Focus on Tax Controversy - Spring 2014


Company Jet Audit Issues: A Word to the Wise -

Once a business attains a certain level of success, an aircraft often becomes a valued asset. Public and closely held private companies alike find that the use of a private aircraft—whether possessed via whole or fractional shares, and whether owned, leased or chartere —fosters secure and efficient transportation for owners and executives. However, this benefit does not come without a price, and it is not unusual for the tax deductions with respect to the typical flight department to run in the $20 to $30 million range. These significant amounts, and the fact that the deduction and other tax rules are so complex and often subjective, have caused company aircraft to catch the attention of the Internal Revenue Service (IRS). A new Information Document Request (IDR), IRS Form 4564, has recently been employed on audits of companies with business aircraft, providing a roadmap for how to prepare for an IRS audit.

Overview -

In order for a business to deduct substantial aircraft-related costs, several complicated tax issues must be vetted, including: (1) the proper depreciation schedule for the aircraft and equipment; (2) the new Internal Revenue Code (Code) Section 274 entertainment disallowance rules; and (3) the passive activity rules. Any actual or deemed payments for use of the plane also may be subject to a 7.5 percent excise tax. Finally, the executives flying may have more imputed income for flights not properly documented as being primarily in the interests of the business rather than an individual benefit. The new IDR requests information that would allow the IRS to determine whether these tax requirements are satisfied.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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