IRS sees flight risk with corporate jets

Eversheds Sutherland (US) LLP

Eversheds Sutherland (US) LLP

On February 21, 2024, the IRS announced a new initiative to audit large corporate taxpayer use of corporate jets, as part of a larger initiative focused on tax compliance of large corporations and high-income taxpayers. The audits, which will use Inflation Reduction Act funding, will focus significant IRS attention on both corporate deductions and individual taxation related to personal flights for the first time in a decade.

From a corporate deduction standpoint, the Internal Revenue Code (Code) provides several deduction disallowances under section 274.

  • Under section 274(a), a company generally cannot take a deduction for entertainment flights on corporate jets. Entertainment flights include many, but not all, personal flights, and typically include business entertainment as well as personal entertainment. Section 274(e) provides that while a company can take a deduction for entertainment flights to the extent they are included in an employee’s income, for most officers and other insiders the deduction is limited to the employee’s income inclusion (which, due to the SIFL rules noted below, is usually substantially less than the actual expense). The regulations at Treas. Reg. section 1.274-10 provide detailed rules for calculating the amount of deduction disallowance associated with entertainment flights. The IRS may raise questions regarding the details of the calculation methodology, handling of so-called “deadhead” flights, and distinctions between entertainment and non-entertainment personal flights.
  • Section 274(l) denies a deduction for commuting expenses, and this generally results in deduction disallowances for corporate jet travel between an executive’s residence(s) and work location. Section 274(m)(3) generally denies a deduction for corporate jet usage by an executive’s spouse or other guest. The IRS may examine compliance with the commuting and spouse/guest disallowances.

From an individual taxation perspective, personal flights provided by an employer are taxed as compensation income under section 61 of the Code, subject to limited exceptions. Treas. Reg. section 1.61-21(g) provides the rules that most companies use to determine the allocation between personal and business flights and the amount of taxable income (the so-called “SIFL” rules). Generally, the regulations provide that a flight that is personal is taxable to the individual. Although in some instances these rules are relatively straightforward, complications arise in scenarios such as:

  • Multi-leg trips in which some legs are business-oriented and others are personal.
  • Travel with equally mixed personal and business aspects.
  • Treatment of executive guests who have some business connection.
  • Trips involving “drop off” locations of other corporate jet users.
  • Bona fide security programs and compliance with all the technical rules entailed.
  • Application of the 50% occupied seat rule in various situations.
  • Emergency or unplanned business travel to or from a vacation destination.
  • Director travel in which the director is picked up and/or dropped off at a location other than the director’s home location.

Companies may wish to review their corporate jet imputed income and deduction processes and tax filing positions in light of these coming audits.

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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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