Why 2021 May be a Good Year for Businesses to Buy Aircraft by Angie Adames, CPA
Posted on July 22, 2021
It’s no wonder that the commercial air travel restrictions and individual concerns over personal safety during the COVID-19 pandemic spurred a global increase in private jet sales. According to market intelligence firm JetNet, sales and leases of pre-owned aircraft during the first four months of 2021 were up 32 percent over the same period in the prior year and up 16 percent over 2019. In addition to all the luxurious perks and conveniences that come with private air travel, aircraft owners in the U.S. can reap significant income tax savings when they plan carefully.
Under current tax law, businesses may write off the full 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. Previously, the deduction was limited to 50 percent and applied only to new aircraft. It is critical that taxpayers recognize the time sensitivity of this 100 percent bonus depreciation deduction, as it is set to begin phasing out in 2023. At that point, the IRS calls for the deduction to decrease to 20 percent per year and phase out completely for aircraft put into service after Jan. 1, 2028.
As an example, consider a business with $5 million in taxable income for 2021 that pays $3 million to purchases a previously owned jet to be used 100 percent for business purposes. The business would be allowed a $3 million bonus depreciation deduction that would reduce its 2021 taxable income to $2 million, thereby reducing the company’s tax liability. Alternatively, the taxpayer, may forgo claiming bonus depreciation in 2021 and instead depreciate the costs of the aircraft over the next several years.
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.
For example, the tax laws state that 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, expenses the taxpayer incurs at the destination where business is conducted may be deductible. 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. As a general rule, when a taxpayer’s spouse or other family member joins him or her on a business trip, the expenses attributable to the spouse’s travel are not deductible unless it can be demonstrated that the spouse’s presence has a “bona fide” business purpose for which the spouse provides an essential service.
Moreover, while currently 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.” Therefore, if the sole proprietor’s primary purpose for the trip is business-related, the aircraft expenses are deductible even if there are other passengers who are traveling for personal reasons.
Yet, 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 for 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 an associate 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.