Business, Personal, and Entertainment Use — Why It Matters to Your Bottom Line
Now that you’ve purchased the aircraft, how you use the aircraft will have a tremendous impact on how costs associated with the aircraft are deducted. An aircraft is usually one of most valuable assets on a company’s balance sheet, so it is important to develop detailed policies and procedures that address how to create contemporaneous aircraft records and maintain them. Jetlaw can help you.
Your pilot knows information about your arrivals and departures and how many passengers are on board, but does she know the reason why the trip occurred? Your accounting team knows the costs of operating the aircraft, but do they know where the aircraft flew last year? The tax code requires aircraft operators to keep accurate records about the aircraft’s use.
Track Depreciation Eligibility to Preserve Bonus Deductions
To deduct depreciation — especially bonus depreciation — the IRS requires the aircraft to be used more than 50% for qualified business use. If you fail to meet more than 50% business use, you are not eligible to claim bonus depreciation or accelerated depreciation. Even worse, if you previously accelerated depreciation and business use later drops below 51%, the IRS can recapture the difference — meaning you’ll owe additional income taxes for that period.
Maximize Operating Expense Deductions Through Accurate Usage Tracking
Expenses like fuel, maintenance, hangar fees, insurance, and crew costs are only deductible to the extent the aircraft is used for business. For example, if your aircraft is used 60% for business, you can only deduct 60% of the operating costs.
Identify and Limit Non-Deductible Entertainment Flights
Even if a flight is for business purposes, if it’s classified as entertainment (e.g., flying a client to a golf event or fishing trip), those costs are often non-deductible or limited under IRC §274.
Jetlaw will work with your accounting team and flight department to track the right data, ensuring IRS compliance and optimized deductions.
Report Personal Flights Properly to Avoid Fringe-Benefit Penalties
When an employee, officer, or director uses the company’s aircraft for non-business purposes, the tax code classifies the personal use as a fringe benefit that is taxable income to the employee.
The fringe benefit is determined based on a per-passenger basis. Most companies elect to value the fringe benefit under Standard Industry Fare Level (“SIFL”) rules provided in Treasury Regulation 1.61-21. Under SIFL, the value of a personal flight is calculated based on a formula that uses the amount of statute miles flown for the trip, the weight of the aircraft, and the status of the employee.
For flights that contain mixed-use legs, where a flight occurs for both business and personal reasons, the company must determine what the primary purpose of the overall flight was for. It is important to be able to justify and provide records when categorizing multi-leg mixed-use flights.
Jetlaw helps you:
- Calculate fringe benefit values using the SIFL formula.
- Properly allocate multi-leg trips.
- Document everything to support compliance and minimize audit risk
Apply the Most Favorable IRS Method to Reduce Entertainment Disallowance
Section 274 of the Internal Revenue Code governs limitations on deductions for entertainment expenses, and it has significant implications for businesses operating aircraft — especially when used for client entertainment or personal executive travel. This rule applies to the cost of flights that are categorized as entertainment-related, such as:
- Flying a client to a sporting event.
- Flying executives to a golf retreat.
- Personal travel that might include incidental business discussion.
Operating a business jet involves significant costs: fuel, maintenance, crew, hangar fees, depreciation, etc. If any part of a flight is considered entertainment, then a portion of those costs becomes non-deductible — and that portion must be calculated and disallowed from your tax return.
A taxpayer may track the entertainment disallowance under four different methodologies and choose the methodology that results in the lowest amount of disallowance for the year. Those methodologies are:
- Occupied Seat Hours – Allocate flight costs based on each passenger’s seat time.
- Occupied Seat Miles – Allocate flight costs based on each passenger’s miles flown.
- Flight by Flight Hours – Allocate flight costs based on total flight hours flown by the aircraft.
- Flight by Flight Miles – Allocate flight costs based on total flight miles flown by the aircraft.
Jetlaw works with you to identify flights that qualify as entertainment. We will help you calculate the non-deductible portion using the most favorable of four IRS-approved methods.
Avoid Unnecessary Federal Excise Tax (FET) on Your Aircraft Operations
Federal Excise Tax (FET) is a tax separate from the income tax which is imposed by the IRS under IRC §4261 and §4081 on air transportation of persons and property for hire. It generally applies when passengers or cargo are transported in exchange for payment.
FET generally applies to operators under Part 135 but may also be applicable to Part 91 operators when reimbursement is being sought under a time sharing agreement or other reimbursement for flight costs allowable under the FAA’s regulations. Exemptions may apply for long-term leases and other similar structures.
Jetlaw advises clients on whether FET applies to their operations (Part 91 or 135) as well as how to structure time sharing and reimbursement agreements to avoid triggering FET. We will also counsel you on how to stay compliant while maintaining operational flexibility.