Deductibility of Business Aircraft: Private Planes No Longer Are a Luxury
The concept of business travel changed forever on September 11, 2001. The inconveniences and risks businesspeople now experience with commercial air travel have resulted in the increasing popularity of company-owned aircraft. With this shift CPAs must be prepared to justify expenses for the use of such aircraft as a business deduction for their employers or clients. A successful defense of this travel deduction requires evidence the expense is ordinary, necessary, reasonable and not lavish. Adequate planning and appropriate documentation can help companies maximize their use of corporate aircraft and support tax deductions. ORDINARY EXPENSES What makes a business expenditure ordinary? Even before September 11 the use of company-owned aircraft for employee travel had become common as businesses needed to be mobile to be successful. The need for mobility, along with higher prices for commercial air travel, created a climate where owning and operating an aircraft no longer was considered lavish. In a survey by the National Business Aviation Association (NBAA) of companies that use turbine-powered aircraft for business travel, passengers reported taking an average of 21 trips by air in a six-month period, using company planes for 60% of them. In the NBAA's 1999 utilization strategies survey, 45% of organizations reported they had increased their use of company aircraft in the past 12 months. Approximately one-third expected access to business aircraft to increase over the next three years. The NBAA also reported a surge in shared ownership of planes among smaller companies that wanted the convenience of private jet travel. Companies can deduct travel expenses while employees are working away from home in the pursuit of a trade or business as ordinary and necessary expenses under IRC section 162(a). Treasury regulations section 1.162-2 explicitly includes "travel fares" that are reasonable, necessary and directly attributable to business as valid trade or business expenses. The law considers an expense ordinary if it is "common and accepted," comparing the taxpayer with "the group, the community, of which he is a part" (Welch v. Helvering, 290 US 111, 114, 54 Sup. Ct. 8, 78, 1933). In Noyce v. Commissioner (97 TC no. 46, 97 TC 670 (1991)), the court said the taxpayer incurred ordinary expenses when there was a clear business advantage and when the cost of replicating the travel schedule and the time savings via commercial charter would have exceeded the costs of operating a company aircraft. NECESSARY EXPENSES Because personal aircraft had for so long been viewed as a lavish business perk, the courts require taxpayers to prove that aircraft they claim as business deductions are actually necessary for their business and not just for the owner's benefit. To ensure full deductibility, CPAs need to help taxpayers document the business use of their airplanes. In Richardson v. Commissioner (72 TC Memo, 348 (1996)), the taxpayer maintained logs to prove he used his plane personally for only 3% and 9% of the time for the two years in question. He reimbursed the company for any personal use. With no current limits on business aircraft expenses as a luxury item or limited-use asset, the law allows a full deduction for expenses the taxpayer can support by providing proof of the business necessity to obtain a full deduction. Some taxpayers have used the notion of urgency to support the necessity of business aircraft. The Tax Court in Richardson addressed the use of the airplane for quick responses to emergency situations. Revenue ruling 70-558 allowed a deduction for the business use of aircraft when the employer did not require the use but permitted employees to travel by the company plane in urgent situations. The IRS allowed the deduction to the extent the amount exceeded the standard travel reimbursement rates for government officials. Business aircraft allow employees to travel when they can't get commercial flights. …