The National Business Aviation Association held its annual one-day tax seminar in Dallas, Texas, in mid-May. The program schedule included panels on FAA regulations, various tax issues, personal use of business aircraft, depreciation, and sustainable aviation fuel.

This year’s event had two additional segments – “Carriage of Political Candidates” and “Corporate Transparency Act [CTA] Impact on Aviation” – in view of the political season and the new CTA legislation that places disclosure requirements on key principals associated with entity formation. The carriage of political candidates is a very complicated space involving a host of FAA and Federal Election Commission rules (which we have written about previously in this space). Legal and tax advice is highly recommended for anyone flying political candidates around, as the rules can vary depending on the political office sought and the specific jurisdiction flown.

Recent litigation has shut down enforcement of the CTA in select jurisdictions, with the possibility of additional lawsuits to come over constitutional concerns. Attorneys and other professionals in the aviation space involved with tax structuring and entity formation should be cognizant of the CTA and its disclosure requirements when advising clients. Specifically, persons with a beneficial ownership interest in an entity must be disclosed to the Financial Crimes Enforcement Network (also known as FinCEN).

The talk of the conference, however, and the elephant in the room, was the Biden Administration’s plan and the February IRS press release announcing audits on aircraft owners and operators, that we also previously addressed in this space. While many would like to paint all aircraft owners and operators as unscrupulous tax avoiders, industry professionals know that business aircraft provide a crucial resource through emergency medical flights, transporting necessary goods in real time where needed, allowing business to save costs in the long run by visiting operations they could not efficiently or effectively do otherwise, and transporting political candidates and government officials around the globe.

Since the announcement earlier this year, the IRS has begun a handful of aircraft audits, according to industry professionals, and the lesson is clear: It is imperative that aircraft owners and operators properly substantiate business versus personal use of aircraft.

One issue is the “entertainment disallowance” found in section 274(a)(1), which say “[n]o deduction otherwise allowable under this chapter shall be allowed for … an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or … [w]ith respect to a facility used in connection with an activity referred to [herein].” The referenced “facility” could possibly include aircraft.

Deductions were previously allowed for “business entertainment”.[1] However, the Tax Cuts and Jobs Act of 2017 revised section 274 and eliminated this distinction. Now, all entertainment deductions – whether business or personal – are non-deductible. What this means is that expense deductions that were previously allowed for business entertainment are no longer available, thus making this very fact-specific inquiry ripe for audit, particularly with those who the IRS may perceive to be sneaking in disallowed entertainment expenses as proper business expenses.

The IRS defines entertainment broadly. Entertainment can mean “any activity which is of a type generally considered to constitute entertainment, amusement, or recreation, such as entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips, including such activity relating solely to the taxpayer or the taxpayer’s family.” See Treasury Regulation § 1.274-2(b)(1)(i).[2]

Another issue involves flights that are not for entertainment relating to the company’s business, but are personal flights provided to executives of the company, who use the company aircraft to travel to destinations for entertainment purposes. Deductions allocable to these flights are disallowed under section 274(e)(2) and Treasury Regulation § 1.274-9 and -10. Covered executives, known as “specified individuals,” whose personal flights for entertainment are subject to disallowance include directors, senior executive officers, and ten-percent or greater equity holders in the taxpayer or related party. This disallowance extends to invited guests of specified individuals. All use of the aircraft must be accounted for, and deductions are disallowed, on a seat-by-seat basis.

Other issues involve sufficient business use of aircraft to qualify for MACRS or bonus depreciation, and imputing income to employees for personal use of aircraft. All these issues are likely to come up in an IRS audit of a private aircraft.

One can immediately imagine a scenario where the IRS makes a detailed examination of a taxpayer’s business expense deductions to ascertain whether a flight was really for business or just for pleasure. This makes adequate documentation crucial. While aircraft owners and operators are under the microscope, and it may be difficult to avoid audit, proper recordkeeping and substantiation is the paramount defense strategy.

Section 274(d)(3) identifies the substantiation requirements for travel expenses and for deductions for “listed property” (which include aircraft), and requires “adequate records or … sufficient evidence corroborating the taxpayer’s own statement” that includes the amount of such expense or other item, the time and place of the travel, the business purpose of the expense or other item.

Unless adequate corroborating evidence of the business purpose is kept, an adequate record of aircraft use for business purposes must be kept in a log with entries that are created at or near the time of expenditure or use. Treasury Regulation § 1.274-5T(c)(2)(ii). Without “adequate records,” the taxpayer will not be able convince an auditor that deductions were properly calculated. The burden is always on the taxpayer to maintain appropriate documentation.[3]

To meet the substantiation requirements outlined above, aircraft owner/operators are advised to include the following on their flight logs:

  • aircraft operated (make/model/MSN/N-number),
  • flight date,
  • origin airport,
  • destination airport,
  • flight legs,
  • flight time,
  • distance,
  • primary trip purpose,
  • business purposes, if any, of each passenger on each flight leg,
  • number of passengers,
  • identify of passengers,
  • “specified individuals” of the company as defined in Treas. Reg. 1.274-9,
  • purpose of the trip for each passenger—and be as detailed as possible for activities conducted by the passenger during the entire period at the destination,
  • relationship of the passengers to the business,
  • crew identities, and
  • return flight information.

Aero Law Group is well-versed with the tax issues referenced above and can also partner with its clients’ regular tax professionals to build the best possible position to defend an audit. Prepare for an aircraft audit now, rather than scrambling to respond to an audit if and when you actually receive it.

The information in this article is intended to highlight potential issues with aircraft ownership and operations and is therefore general in nature.  Please feel free to contact one of our experienced aviation attorneys directly to discuss your specific business/personal needs.

[1] See IRS Notice 2018-76, at 1, (accessed June 7, 2024).

[2] Note also the following example: “travel to attend a family member’s funeral is not entertainment.” Treasury Regulation § 1.274-10(b)(1).

[3] “The responsibility to prove entries, deductions, and statements made on your tax returns is known as the burden of proof. You must be able to prove (substantiate) certain elements of expenses to deduct them.” See, (accessed June 7, 2024).