Initially, tracking systems were employed to monitor the private jet usage of celebrities like Taylor Swift. Now, similar scrutiny will extend to executives who utilize business aircraft for personal purposes while claiming tax deductions.
IRS Initiatives
The IRS announced that it will be conducting numerous audits on the personal use of business jets by executives, aiming to ensure compliance with tax regulations. This initiative is part of the agency’s ongoing efforts to target high-wealth individuals who exploit loopholes in the tax system, ultimately burdening American taxpayers.
These audits will primarily target large corporations and high-income individuals, examining whether the tax deductions claimed for private jet usage are accurately allocated for business purposes, as per IRS guidelines. With over 10,000 corporate jets in the US, valued at significant sums, many of these assets can be fully deducted.
Tax Legislation Impact
The Tax Cuts and Jobs Act, enacted during the Trump administration, introduced measures such as 100% bonus depreciation and expensing of private jets, allowing taxpayers to write off the entire cost of aircraft purchased and placed into service between September 2017 and January 2023. It was cited that the IRS committed to leveraging resources from initiatives like the Democrats’ Inflation Reduction Act to intensify scrutiny on private jet usage. The IRS acknowledged past limitations due to budget cuts, which have hampered the agency’s ability to address high-end noncompliance adequately. Audit rates have been notably low, with a decline observed in recent years, particularly in audits targeting high-income individuals and corporations.
“Business aircrafts are often used for both business and personal reasons by officers, executives, other employees, shareholders, and partners. In general, the tax code passed by Congress allows a business deduction for expenses of maintaining an asset, such as a corporate jet, if that asset is utilized for a business purpose. However, the use of a company aircraft must be allocated between business use and personal use. This is a complex area of tax law, and record-keeping can be challenging,” according to an IRS press release.
Ownership and Tax Implications
Some private aircraft are owned by a separate legal entity instead of directly by the operating business. This solves liability problems but can create tax problems because payments between related entities can lead to federal excise taxes on air transportation. Setting aside the question of how the aircraft is owned (or partially owned), the answer to the question of whether the cost of private flights is deductible is – as with most legal questions – it depends. The American Jobs Creation Act of 2004 and its regulations put additional limitations on deducting aircraft for personal use.
Criteria for Deductibility
In order to be tax-deductible, at a minimum, the purpose of the flight must be for business. If business is typically conducted locally, the cost of private flights likely won’t be deductible. In addition, if business travel is between major cities that are regularly served by major airlines, the IRS will be reluctant to allow the cost of a private flight as an ordinary and necessary business expense.
Preparation for Audits
If you’re worried about being chosen for this IRS audit, it’s crucial to gather all necessary records for the years you claimed deductions. Those records, at a minimum, should include:
- Date of flight
- Departure airport
- Arrival airport
- Flight hours and miles
- Passenger manifest
- Purpose of flight for each passenger
- Relationship to the company
- Evidence of lack of available commercial flight option (Not required but certainly good to have)
In conclusion, preparing for these audits is intense, and beginning the process now is the best approach. For additional assistance, please contact KJK attorneys Scott Norcross (SAN@kjk.com) or Paige Rabatin (PMR@kjk.com) or an attorney within KJK’s Tax & Tax Exemption practice group.