Introduction - Although expenses related to business aircraft are deductible under Section 162 of the Internal Revenue Code (Code), Code Sections 274(e)(2) and (9) were amended by the American Jobs Creation Act to deny any deduction with respect to expenses in excess of the compensation included in income for entertainment, amusement or recreation travel by specified employees, generally defined as owners, officers and directors along with their guests. For example, after 2004, if $1 million of allocable airplane expense was incurred for entertainment travel, with only $100,000 included in income for the travel by the specified individual, then the disallowance or “take away” would be $900,000. Conceptually, the entertainment disallowance is similar to the 50 percent deduction disallowance for business meals and entertainment; although the expenses are recognized as legitimate business expenses, for policy reasons, a portion is disallowed.

Internal Revenue Service (IRS) Notice 2005-45 sets forth the basic framework for the allocation of the take-away under Code Sections 274(e)(2) and (9). The basic framework is that all expenses or costs related to an aircraft owned, leased or chartered by an employer must on an annual basis be totaled, and the percentage allocated to entertainment, amusement or recreation travel by specified employees that is not included as income to such specified employees is disallowed as deductible. IRS Notice 2005-45 provided very detailed rules for determining the percentage related to entertainment travel, referred to as the “seat-by-seat” method.

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