[co-author: Sam Brady]

On February 21, 2024, the IRS announced[1] plans to begin audits on aircraft that may be used for both business and personal purposes. This push is a part of the IRS’s broader focus on improving tax compliance in high-income categories and is being funded by supplemental funding allocated to the IRS by the Inflation Reduction Act.

The IRS will deploy advanced analytics and resources to scrutinize this area which they say has not been closely scrutinized in the past ten years. The IRS does not dispute that, when properly segregated between business and personal use, expenses from business use of a business jet as an asset deployed for a business purpose are properly deducted. However, this campaign focuses on when business jets are used for mixed personal and business use, due to the potential for taxpayers to attempt to deduct expenses from personal use.

Deducting Business Expenses

Under Internal Revenue Code Section 162(a), all ordinary and necessary expenses paid or incurred during the taxable year in the carrying on of a trade or business may be deducted. To state this another way, expenses can be deducted if they can be shown to be (i) ordinary to the business, (ii) necessary to the business, and (iii) incurred in carrying on the same trade or business. There is significant and detailed caselaw clarifying the important parts of Section 162(a). “Necessary” has not been limited to what a taxpayer is needed or obliged to purchase but rather has been read expansively to cover what is “appropriate and helpful.”[2] That an expense is “ordinary” may be shown by a finding that others in the deducting taxpayer's relevant business community routinely undergo similar expenses[3] or that the taxpayer’s intent in taking the expense was primarily to protect their business and that the expense was approximately related to that business.[4]

Potential Audits

Taxpayers will likely need to substantiate their use of business assets for business purposes to deduct the related expenses. Taxpayers unable to prove that they are eligible to deduct these expenses will face the disallowance of such claimed deductions, as well as the inclusion of income from the potential personal use of business jets, interest, and the potential penalties. Detailed record-keeping to delineate between personal and business use of any business asset, such as a jet, is essential to sustain tax deductions.

Best Practices

For planned mixed-use jets, taxpayers may want to consider creating a holding company for the jet that will rent the jet to the taxpayer at fair market rates for personal use. The business use of the jet would be similarly expensed against the taxpayer’s main company. This way, under audit, personal use and business use would be clearly segregated, and the deduction would be easier to defend. It is strongly recommended that taxpayers speak with a their tax advisor regarding the specifics of their situation.

[1] IRS IR-2024-46, Feb. 21, 2024

[2] See Welch v. Helvering, 290 U.S. 111 at 113 (1933).

[3] Id. At 114.

[4] See Jenkins v. Comm’r, T.C. Memo. 1983-667 (1983).