Taylor Swift’s private jet flight from her concert in Japan to the Super Bowl in Las Vegas was tracked as heavily by my 11 year old daughter and other so-called Swifties as heavily as she tracked Santa on Christmas Eve. Whether that flight is tax deductible may now be the subject of an Internal Revenue Audit. The IRS announced today plans to begin dozens of audits on business aircraft involving personal use.
Are Private Jet Flights Tax Deductible?
“Business aircraft 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.
Having represented several taxpayers in audits involving private and corporate jet usage, I can comfortably say that calling this a “complex area of law” where “record-keeping can be complicated” is a severe understatement. 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 are 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.
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 loathe to allow the cost of a private flight as an ordinary and necessary business expense.
Good Recordkeeping is Key
Anyone who fears they might be selected for this type of IRS audit should start making sure that all of the relevant records for any years in which a deduction was taken now. 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
• Relation
• Evidence of lack of available commercial flight option (Not required but certainly good to have)
Why Now?
The Tax Cuts and Jobs Act created a temporary 100 percent deduction for certain business assets, allowing businesses to deduct the entire cost of assets such as private jets in the first year if the property was acquired between September 27, 2017 and before January 1, 2023. Suddenly owning a private aircraft is a lot more attractive to corporations and high net worth individuals. Couple that with the recent influx of funding the IRS received from the Inflation Reduction Act and the increased efforts to examine high-income, high net worth individuals, and the IRS set its sights up in the sky.
“The IRS continues to increase scrutiny on high-income taxpayers as we work to reverse the historic low audit rates and limited focus that the wealthiest individuals and organizations faced in the years that predated the Inflation Reduction Act,” according to IRS Commissioner Denny Werfel. “We are adding staff and technology to ensure that the taxpayers with the highest income, including partnerships, large corporations and millionaires and billionaires, pay what is legally owed under federal law. The IRS will have more announcements to make in this important area.”
As with any new IRS audit campaign announcement, those who fear they might be selected for the private jet audit campaign should call a tax attorney now. Preparing for these audits is labor intensive, and the more time to prepare for them, the better.
