---
url: 'https://www.fmjlaw.com/fmj-looks-at-aviation-and-taxes-part-1-of-3/'
title: 'FMJ Looks at Aviation and Taxes – Part 1 of 3'
author:
  name: Adam
  url: 'https://www.fmjlaw.com/author/adam-brownfmjlaw-com/'
date: '2023-07-13T21:46:56+00:00'
modified: '2023-07-13T21:48:03+00:00'
type: post
summary: When Can Businesses Deduct the Costs of Aircraft Operations?
categories:
  - Article
  - Thought Leadership
tags:
  - Aviation
  - aviation law
  - aviation lawyer
  - aviation tax
  - tax
  - tax law
  - tax lawyer
published: true
---

# FMJ Looks at Aviation and Taxes – Part 1 of 3

![](https://www.fmjlaw.com/wp-content/uploads/2023/07/Taxes-Quote-1-1024x666.png)

FMJ’s Aviation Team has put together a three-part series on how to avoid some of the lesser understood state and federal tax pitfalls that come with buying, operating, and financing business aircraft and commercial aviation assets.

# Part 1: When Can Businesses Deduct the Costs of Aircraft Operations?

Fred Willard, a Michigan business owner, takes the company aircraft to fly to an industry convention in Orlando on Monday and Tuesday. He brings along his wife and three kids, and they decide to stay over and visit Disney World, returning on Saturday. The next week he tells his accountant all about the great meetings he had on Tuesday and raves about the Rise of the Resistance ride at Disney Hollywood Studios. He also instructs the accountant to write off the entire cost of the round-trip flights. His accountant goes pale as Fred rushes off the Zoom call, confident that it will all work out.

What did the accountant know (or suspect) that made him worried? 

One thing Fred’s accountant knew is that deducting aircraft expenses is much more difficult since the 2017 Tax Cuts and Jobs Act. While many of the old rules applied to deducting business expenses, the Act and the patchwork of temporary and final guidance from the IRS resulted in some fundamental changes that the accountant did not fully understand. And the accountant suspected that Fred’s plans were not going to result in the deductions Fred had hoped for. Assuming the accountant did the right thing and checked in with Fafinski Mark & Johnson, he would have learned that there are a few key factors that must be considered along with a number of basic and special rules that must be applied to the facts.

## **Where to Start? The Key Questions**

Determining flight expense deductibility initially comes down to a few key questions:

- Is the travel for business or personal use?

- Is the travel for entertainment or non-entertainment purposes?

- Is company travel being provided to an employee as compensation, i.e., an employee benefit?

- Is that employee an officer, director, more than 10% owner, or other “specified individual?”

- Does the employee travel constitute “commuting?”

This analysis is complicated and takes some work. Once you can answer these questions as to each flight, you can largely decide to what extent you can deduct the costs. The following discussion outlines how to analyze these questions.

### ***Is the Travel for Business or Personal Use?***

Under IRC Section 162, aircraft operating expenses are considered deductible only if (or to the extent) that the expenses for a company’s use of an aircraft are ordinary and necessary business expenses for carrying on the company’s trade or business. How does a business meet that standard? There are several key considerations:

- **Was the travel related to the trade or business of Fred’s company?** If not, then he should assume the travel is personal. But bear in mind that even personal travel for employees may be deductible if it constitutes compensation for the employee (more on this later).

- **Is the travel *primarily* related to Fred’s trade or business?** This is known as the Primary Purpose Test (IRS Reg. Section 1.162-2(b)(i)), and it asks whether a mixed-use trip is primarily for business or personal travel. This can be decided based on the time spent on the trip for each (two days for a conference, four days at the resort with family, for instance, would probably be personal), but other factors come into play. Are the family members also bona fide employees of the company and travelling on business? How many of the passengers are flying solely for business as opposed to for family personal travel? What if Fred’s business is in event planning, such that travel *is his business*? 

- **Is the use of the aircraft reasonable as a deduction as opposed to alternate travel arrangements? **A 2001 chief counsel opinion from the IRS concluded that a taxpayer’s use of a personal aircraft was not reasonable, and the taxpayer should only be able to deduct the costs of a first class commercial ticket for flights on his company aircraft. This conclusion tends to be on the more extreme end of most interpretations, however, and if you can show that the use of the type of aircraft for the type of travel is appropriate, your result should be better. For instance, to use a Citation for travel between Minnesota and Florida might be fine, whereas the use of a G650 for regular trips between Minneapolis and Rochester might be considered lavish and overkill. Factors might include the number of trips involved, the distance traveled, the value of the traveler’s time, the availability of commercial aviation flights, and the costs of commercial air travel versus the cost of operation of the aircraft (among others). For Midwest clients, the lack of commercial flights between nearby states without a distant connection could be very persuasive.

- **Do you have adequate documentation of the primary business purpose of the trip?** To justify the deductions in an audit, you will be required to demonstrate the facts supporting it. It is always best to have contemporaneous documentation of the facts supporting deductibility, preferably in the pilot log books and possibly in documentation provided to your bookkeeper or accountant at the time of the flight.

### ***Is the Travel for Entertainment or Non-Entertainment Purposes?***

Following the 2017 Tax Cut and Jobs Act, entertainment expenses are generally not deductible for businesses under IRC Section 274, including entertainment-related expenses related to aircraft usage. How do you know what constitutes “entertainment?” Under IRS Treasury Reg. Section 1.274-11(b), “entertainment” is determined by an objective test as to whether an event or activity is “of a type generally considered to constitute entertainment.” While that rule is not terribly helpful, the regulations and other guidance over the years give plenty of examples of what constitutes entertainment. Among them:

- Any activities that are ordinarily considered to constitute entertainment, amusement, or recreation.

- Hunting, fishing, and camping trips.

- Sporting events such as professional or college ball games or the Kentucky Derby.

- Entertaining at country clubs, golf courses, and athletic clubs.

- Beach properties.

- The taxpayer’s home. 

Travel to a convention is typically considered a non-entertainment event, so long as the there is a nexus to the trade or business of the taxpayer or the taxpayer’s employer. Hosting a dinner at a trendy restaurant outside of the convention might constitute entertainment, however. Also, under the regulations, taxpayers may take into account whether the entertainment is actually a part of a taxpayer’s business. Could a visit to a beachfront resort by an event planner, for instance, be primarily a business activity, scouting for a potential client event there? Maybe yes. 

As with any IRS matter, the taxpayer that can document facts to demonstrate that an event is more business than entertainment is more likely to sustain the position in an audit. For instance, would expenses for recreational, social, or similar activities provided for employees constitute a team building exercise or a paid-for vacation? How the employer characterizes this trip to its employees, the public, and the IRS might affect how it would be viewed in an audit.

### ***Is Company Travel Being Provided to an Employee’s Family and Guests as Compensation, i.e., an Employee Benefit?***

In general, when an employee is granted the use of a company aircraft, it is viewed as providing an employee benefit to the employee, similar to providing a company car. When this occurs with respect to the use of a company aircraft, income should be imputed to the employee as an employee benefit for the value of the flight, increasing the employee’s gross income by such value and providing a corresponding deduction for the company for wages paid. The value of the flight is usually determined based on either the fair market value of the transportation (at fair market charter rates) or the Standard Industry Fare Level (SIFL) rates. The value may be decreased by any amount of reimbursement by the employee, although such reimbursement is generally prohibited by the Federal Aviation Administration (FAA) rules absent a specific exclusion for charter or time sharing flights, for instance.  

If the employee’s family or guests are on board, with or without the employee being present, the value of that travel is imputed as well. The other key thing to know is that the IRS views the term “employee” more broadly than a current W-2 employee. Under 26 CFR § 1.61-21 – *Taxation of Fringe Benefits*, “the term ’employee’ includes any person performing services in connection with which a fringe benefit is furnished, unless otherwise specifically provided in this section.” This includes a partner, director, or an independent contractor, among others, as well as former employees.

### ***Is the Employee a “Specified Individual?”***

The deductibility of costs for personal flights provided to “specified individuals” for personal use is considerably narrower than for employees in general. Under current (though still temporary) IRS guidance, a “specified individual” is any individual who is subject to Section 16(a) of the Securities Exchange Act of 1934 with respect to the company furnishing the aircraft. This primarily includes any officer or director of the company, or any person who owns more than 10% of the company.

### ***Does the Employee Travel Constitute “Commuting?”***

Under IRC Section 274(l)(1), “no deduction shall be allowed…for any expense incurred for providing any transportation, or any payment or reimbursement, to an employee of the taxpayer in connection with travel between the employee’s residence and place of employment, except as necessary for ensuring the safety of the employee.” Fortunately, clarifying regulations make this distinction narrower than it sounds.

To start off, “employee” in this case is narrower than under the income imputation rules above. “Employee” means anyone who provides services to a company for compensation but excludes contractors. “Employee’s residence” is unfortunately quite broad and means any residence of an employee, whether permanent or otherwise. An “employee’s place of employment,” however, should be only one principal place of business, so travel from the Employee’s residence to multiple locations may not constitute commuting. In determining whether safety requires commuting via a company’s private aircraft, a company can take into account whether conditions exist that would cause a reasonable person, under the facts and circumstances, to consider the travel unsafe. The regulations describe this in terms of it being unsafe for the employee to walk to or from home or use public transportation, but this can obviously be translated to look at whether the company or executive is in a highly public or risky profile, whether there are known potential threats, or if alternative travel at the origin or destination is known to be unsecure. “One of the factors indicating whether it is unsafe is the history of crime in the geographic area surrounding the employee’s workplace or residence at the time of day the employee must commute.” (Treasury Reg. Section 1.61-21(k)(5)).

## **Applying the Facts to the Rules**

Once you have the basic answers to the six questions above regarding your flight or flights, you can generally determine the deductibility of your expenses. It is not uncommon for tax practitioners to separate flights into one of three or four buckets, but it is somewhat more complicated than that, and we have broken these down into six different classifications. Depending on which of the six classifications best describes your flight, the deductibility is readily determined as follows:  

| **Flight Classification (Primary Purpose of the Flight)****** | **Employer Deduction Available?****** | **Income Imputed to Employee for the Flight?****** |
| --- | --- | --- |
| **BUSINESS** | Deduction allowed for the cost of the flight, and the entertainment cost disallowance does not apply. | No imputed income for the employee on business.   Income may be imputed to the employee for travel of family or non-business guests of employee. (Assumes guests do not change primary purpose of flight as business.) |
| **BUSINESS *ENTERTAINMENT*** | No deduction allowed, and the entertainment cost disallowance applies. | No income imputed to the employee on business.   Income may be imputed to the employee for travel of family or non-business guests of employee. |
| **PERSONAL** ***NON-ENTERTAINMENT*** | Employer deduction allowed for the cost of the flight, and the entertainment cost disallowance does not apply. | Income is imputed as to employee, family, and guests. |
| **PERSONAL *ENTERTAINMENT*** **(Specified Employees)** | Entertainment cost disallowance applies.  Employer deduction allowed up to the amount of income imputed to the employee as compensation. | Income is imputed as to employee, family, and guests. |
| **PERSONAL *ENTERTAINMENT*** ******(Non-Specified Employees)** | Employer deduction allowed for the cost of the flight, and the entertainment cost disallowance does not apply. | Income is imputed as to the employee, family, and guests. |
| **COMMUTING** | No employer deduction allowed unless to ensure safety of employee. | Income is imputed as to employee, family, and guests. |

Of course, determining the deductibility can be more complicated, and there are multiple other considerations that can come into play. For instance:

- **Special Rules for Meals.** Businesses previously could deduct 50% of the costs of meals associated with the operation of a trade or business. Under the 2017 Tax Cut and Jobs Act and subsequent regulations, you would expect that the entertainment disallowance would essentially wipe out these deductions. However, under the new rules, food and beverage/meal expenses do NOT constitute entertainment, and deductibility is permitted if you meet the specific requirements. These rules are complicated and could easily constitute an entire article unto themselves. Suffice to say that if this is of concern to you, FMJ can help you parse these new rules.

- **Other Entertainment Considerations.** Whether or not an expense is disallowed as entertainment under Section 274(a) is subject to additional exceptions under Section 274(e), such as whether the activity is: (1) performance of services for an employer or other person under a reimbursement or other expense allowance arrangement; (2) expenses for goods, services, and facilities made available to the general public; or (3) expenses for goods or services sold by the taxpayer in a bona fide transaction for full and adequate consideration.

## **Business Structure Considerations**

While the rules above apply to many businesses, the nature of your company or business can change the analysis considerably. For instance:

- **Hobby Loss Rules.** If the IRS considers your business a hobby, the deductibility of these expenses becomes considerably more limited.

- **Sole Proprietorship Rules.** The rules above vary for sole proprietorships.

- **Passive Loss Limitations.** If your business is primarily passive activity (as with leasing companies, for instance), your passive deductions are generally limited to your passive gains.

- **Depreciation Generally.** The discussion above is about operational expenses only, so depreciation is a different discussion altogether.

## **Final Thoughts**

When considering the classifications above and the deductibility of expenses, it is important to remember that the legal burden on deduction of expenses is on the taxpayer. So when Fred comes home from his Orlando trip, it is incumbent on him and his flight crews to keep good records of the purposes of the trip, how it can be demonstrated to be for business primarily, etc. Ideally, these records would include, with some certainty, the amounts, dates, and locations of the expenses, the business purpose of the expenses, and identification of who attended. The failure to document these items according to the IRS’s requirements may result in the disallowance of the entire expense.

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