Is Time Running Out for Businesses to Buy Private Aircraft? by Angie Adames, CPA
Posted on October 24, 2022
Corporate aircraft sales that soared during the pandemic slowed slightly in 2022 as fears of a recession continue to weigh on business sentiment. While many companies will sit on the sidelines and take a wait-and-see approach before purchasing a private jet in 2023, others will act before the end of the year, and yield significant tax savings if they plan carefully.
Under current tax law, businesses may write off 100 percent of the costs of qualifying new and used assets, including business aircraft, in the first year of acquisition provided they 1) place the plane in service between Sept. 28, 2017, and Dec. 31, 2022, and 2) use it at least 50 percent of the time for business purposes. On Jan. 1, 2023, bonus depreciation is scheduled to decrease to 80 percent and continue declining 20 percent for each subsequent year until 2027, when it will phase out completely.
As an example, consider a business with $5 million in taxable income for 2022 that pays $3 million to purchase a previously owned jet it plans to use 100 percent for business purposes. The business would be allowed a $3 million bonus depreciation deduction that would reduce its 2022 taxable income to $2 million, thereby reducing the company’s tax liability in the current year. Alternatively, the business may forgo claiming bonus depreciation in 2022, and instead depreciate the cost of the aircraft over the next several years. Should the business wait until 2023 to make that same $3 million purchase, the allowable deduction will only be $2.4 million.
Another tax benefit of jet ownership is a company’s ability to deduct expenses it incurs to operate that aircraft, including costs for fuel and maintenance. However, the IRS makes it clear that these expense deductions are allowed only when they are “ordinary and necessary” for the taxpayer to carry on a trade or business. This, as well as the 2018 tax law’s elimination of deductions for business entertainment expenses, has become a gray area for taxpayers whose use of a private jet may, at times, extend to personal travel or transportation for an employee. In these instances, taxpayers must keep detailed records to account for pure business use under a “primary purpose” test and calculate the appropriate tax deduction.
According to the tax law, if the facts and circumstances surrounding air travel is deemed to be primarily for personal reasons, the traveling expenses to and from the destination are not deductible; however, the taxpayer may deduct the expenses incurred at the destination where business is conducted. Therefore, taxpayers using a private jet for a weekend trip to visit their college-aged child in Boston may not deduct the flight expenses, but they may deduct the costs of a business dinner enjoyed with a client when they arrived in the city. When taxpayers’ spouses or other family members join them on a business trip, the expenses attributable to the guest’s travel are not deductible unless it can be demonstrated that the guest’s presence has a “bona fide” business purpose for which he or she provides an essential service.
Moreover, while tax law generally prohibits businesses from claiming deductions for entertainment expenses, there are exceptions when the value of those costs are 1) treated as employee compensation on the employee’s personal tax return and subject to tax withholding, or 2) treated as gross income for services rendered or 3) as a prize or award to a non-employee.
The IRS recently addressed this “primary purpose” test in a chief counsel advice (CCA) memorandum pertaining to a sole proprietor who used a private aircraft for both business and entertainment purposes. In its findings, the IRS ruled that sole proprietors who own aircraft (either directly or indirectly through a disregarded entity) may use the primary purpose test to determine whether expenses for use of the aircraft are deductible because “a sole proprietor is not an employee of the sole proprietorship and does not receive compensation and wages from the sole proprietorship.”
The IRS in its CCA memo also clarified that sole proprietors may not use the primary purpose test to allocate expenses between entertainment and non-entertainment passengers on flights containing business and nonbusiness passengers. The determination as to whether a mixed-use flight is a deductible business flight or a non-deductible personal flight is a facts and circumstances determination made under Code Sec. 162 and the related regulations and case law.
The rules for deducting business expenses can be complex. The advisors and accountants with Berkowitz Pollack Brant have extensive experience working with professionals and business owners to understand and maximize a broad range of tax-savings opportunities available to them.
About the Author: Angie Adames, CPA, is a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she provides tax and business consulting services to real estate companies, manufacturers and closely held entities. She can be reached at the firm’s Miami office at (305) 379-7000 or firstname.lastname@example.org.