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Certain tax situations invite extra scrutiny from auditors. Deducting expenses related to the use of a corporate jet is one of them.

The IRS has begun a series of audits of businesses and individual taxpayers that focuses on the knotty tax implications of deploying corporate jets for personal use. 

The IRS announced its new initiative last month, saying the $80 billion it received through the 2022 Inflation Reduction Act will help it with the audits.

“Personal use of corporate jets and other aircraft by executives and others [has] tax implications, and it’s a complex area where IRS work has been stretched thin,” IRS Commissioner Danny Werfel said in announcing the audit initiative. “With expanded resources, IRS work in this area will take off.”

The issue has long been a concern for the IRS, but budget constraints have limited agents’ ability to investigate.

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“Corporate-aircraft audits aren’t new,” says Zeinat Zughayer, an attorney and tax controversy manager with Baker Tilly. Now that the agency is putting its new funding to work, however, taxpayers can expect those audits to be more thorough and to reach more filers.

“I feel like they’re always a hot-ticket item any time the IRS pulls in a return for review,” she says. “Once you have a corporate aircraft as part of your business plan, I think being subject to audit is almost a given at some point.”

The corporate-aircraft initiative is part of a larger IRS enforcement campaign to ensure that wealthy individuals and businesses are paying the taxes that they should. In January, the IRS announced that its efforts to recoup tax debts owed by millionaires had resulted in the collection of $482 million in unpaid revenue. More recently, the IRS announced that it had begun sending letters to tens of thousands of high-income earners who hadn’t filed a return in at least one tax year since 2017, saying the initiative aimed to collect hundreds of millions of dollars in unpaid tax revenue.

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In an April 2023 report, the IRS said its overall audit rate for taxpayers with more than $10 million in income was 9.2% in the 2018 tax year, down from 13.6% in 2012. The corporate audit rate dropped from 1.3% to 0.6% over the same period.

The IRS says the plane-related audits, which a spokesman confirms have begun, are targeting “dozens” of corporate jets, though Zughayer suggests that the range could be higher.

“Post-Covid I definitely think there has been an uptick in the purchase of private aircraft, so I would think it will be more than dozens,” she says.

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Last year, there were about 15,000 business jets in service in the U.S., accounting for nearly two-thirds of the global fleet, according to data from Airbus Corporate Jets.

The IRS’ interest in the tax implications stemming from those aircraft can take a few forms, affecting both corporate and individual filers, but the agency’s concern is generally focused on the split in the jet’s usage between business and personal travel.

Companies can claim depreciation on their aircraft, just like other long-term business expenditures. But when executives, family members, shareholders, or others use the plane for recreational travel, those trips can count against the business deduction. Those trips may also need to be reported as a form of income for the individuals.

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One issue the IRS could challenge in an audit involves the eligibility of an aircraft for bonus depreciation, what Zughayer says is a legal matter that turns on whether the company can legitimately claim that more than half of the plane’s travel was for qualified business usage.

Even in cases that don’t involve accelerated depreciation claims, the IRS might expect corporate or individual owners to substantiate the portion of the plan’s usage that was attributed as a business expense, and to verify whether any personal use of the plane should be reported as income on an individual’s return and removed from the depreciation calculation, according to Zughayer.

Her best advice for deducting jet-related expenses: expect an audit, and document everything. An IRS investigation of the business and personal use of a corporate jet might begin with the information in the flight log, but sometimes agents will want to go deeper in their review, in some cases asking about internal emails discussing the agenda for a coming trip for which the plane will be used.

“I’ve had an IRS agent ask me, ‘Well if they attended a conference, give me a copy of the pamphlet that was issued at that conference,’” Zughayer says. “I’ve had to provide itineraries for business meetings to show this was really a business flight, and here’s the backup [emails] to prove it.”

Write to advisor.editors@barrons.com



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