President Biden announced that he will focus on ending tax breaks for corporate aircraft and “cracking down on corporate jet loopholes.”
TAKEAWAYS
- Several aviation and labor organizations, including the National Business Aviation Association, oppose President Biden’s policy proposal and expressed deep concerns that this would harm an essential American industry.
- The standard industry fare level valuation method is under attack, as senators request that the IRS “close a regulatory loophole that helps wealthy taxpayers maximize corporate jet tax breaks.”
- These statements follow the IRS’s February announcement that it will be increasing audits on corporate aircraft use for high-net-worth individuals, large corporations and complex partnerships.
During President Biden’s State of the Union address on March 7, 2024, President Biden announced that he will eliminate tax breaks for corporate aircraft. A White House statement released the same day explains this agenda and states that President Biden will be “cracking down on corporate jet loopholes” in an effort to make high-net-worth individuals and large corporations “pay their fair share.”
The White House statement also explained that President Biden secured funding for the IRS to “crack down on wealthy and big business tax cheats.” Additionally, the president will increase the fuel tax on corporate and private jet travel, so that “corporate executives and other wealthy Americans pay their share for the use of airspace and other public services related to air travel.”
Currently, the Internal Revenue Code offers significant tax benefits for the use of a corporate aircraft, including allowing businesses to claim deductions on the purchase, operating costs and travel associated with a corporate aircraft for business purposes. Moreover, a qualifying corporate aircraft is eligible for bonus depreciation. For example, for tax year 2024, a qualifying corporate aircraft is eligible for 60 percent bonus depreciation, meaning that a taxpayer is allowed an immediate deduction of 60 percent for the cost of a qualifying aircraft acquired and placed in service by the qualifying date. For prior tax years 2018 through 2022, the applicable bonus depreciation percentage was 100 for a qualifying corporate aircraft, meaning that a taxpayer was allowed an immediate deduction of 100 percent.
Critics of President Biden’s statement and proposed policy include several aviation and labor organizations such as the National Business Aviation Association (NBAA), which expressed deep concerns because the plan would “hurt business aviation and the jobs and communities that depend on it, and make it harder for U.S. companies to compete in a global economy.” In a March 14th, 2024 letter to Congress, these organizations noted that business aviation supports 1.2 million jobs and is used mostly by small and mid-sized companies to optimize efficiency, productivity and flexibility. The letter stated that independent studies show that most business aviation flights carry mid-level personnel (such as technical and engineering staff and managers, as well as company clients and customers) to small towns and communities with little to no airline service.
Following the State of the Union address, a group of senators sent a letter dated March 10, 2024, to the Department of Treasury (Treasury) and the IRS, urging the Treasury and IRS to use their rulemaking authority to close a “loophole” that “helps wealthy taxpayers maximize corporate jet breaks” when they use corporate aircraft for personal travel. The letter also applauded the IRS’s recent announcement that it was increasing audits of corporate aircraft usage.
Last month, the IRS announced that it plans to begin dozens of audits on corporate aircraft and specifically focus on the issue of whether the use of the aircraft is being properly allocated between business and personal. The increase in aircraft audits on high-net-worth individuals, large corporations and complex partnerships is a part of the IRS’s new initiative using Inflation Reduction Act funding to expand its enforcement efforts.
The “regulatory loophole” that the senators want to close involves a calculation method known as the standard industry fare level (SIFL) valuation method. The SIFL method can be used to determine the taxable benefit executives, officers, employees or their guests receive when using a corporate aircraft for personal travel. The calculation is based on rates determined biannually by the U.S. Department of Transportation. It was intended to approximately double the amount of first-class commercial airfare.
However, the senators—Senator Elizabeth Warren (D-Mass.), Edward Markey (D-Mass.), Bernard Sanders (I-Vt.), Ron Wyden (D-Ore.), Sheldon Whitehouse (D-R.I.) and Chris Van Hollen (D-Md.)—believe that the current SIFL rates are “woefully undervalued,” which results in allowing wealthy taxpayers to undervalue their personal trips “in some cases by 100 times below market rates.” The senators urge the Treasury and IRS to revisit the “SIFL loophole” and the income inclusion regulations to more accurately reflect the benefit that executives receive when they use corporate aircraft for personal travel.
Currently, the SIFL method is one of the items that can come under scrutiny upon an IRS audit, as the SIFL method uses different calculations for different passengers and several exceptions to these rules exist. For example, if the personal travel by an executive is covered by a bona fide business-oriented security concern, the employer may exclude from the employee’s gross income the excess value of the flight over the “safe harbor airfare.” Incorrect application or use of the SIFL method can result in the disallowance of the SIFL method upon IRS audit. Additional issues can arise in an IRS audit, as navigating the regulatory requirements for corporate aircraft can often be complicated.
Pillsbury continues to closely monitor the federal government’s efforts in targeting high-net-worth individuals, large corporations and complex partnerships, including its new focus on corporate aircraft audits for these taxpayers and the call to remove the SIFL method. Taxpayers with corporate aircraft should be mindful of the increased scrutiny by the President, Congress and the IRS and continue to work closely with their tax advisors to assess their current and proposed aircraft tax reporting positions in the event of an audit.
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