2021 Legislative Outlook
Historically, bonus depreciation only applied to factory new aircraft. This changed with tax reforms of 2017. Bonus depreciation was increased to 100% in the year of an aircraft acquisition, and it applies to both new and pre-owned business aircraft. 100% bonus depreciation has been a boon to the general aviation industry in the past few years and it continues to be applicable for 2021 acquisitions.
However, the new administration has promised changes in tax policies. It is expected that both corporate and individual income tax rates will increase for 2021. There is no specific discussion of repealing 100% bonus depreciation currently, but as Congress negotiates and finalizes the tax law changes, bonus depreciation may revert back to 50% and applicable to factory new aircraft only. Tax law changes were not applied retroactively in the past. Therefore, if your business is considering an aircraft acquisition, you should speed up the process to complete the acquisition under the current applicable laws.
By Daniel Cheung, CPA, Aviation Tax Consultants, LLC
Audit Risk for Business Aircraft
“If you write off a business aircraft, that is a huge red flag, and you will be audited by the IRS.”
In conversations with prospects and CPAs from around the country, I continue to hear this sentiment expressed on a regular basis. While “to write-off or not” is the big question, here is my response to those hesitant to take advantage of income tax benefits available from a business aircraft:
Sure, the IRS likes to audit certain tax returns that meet the criteria set forth by the top-secret audit guidelines and algorithm. However, simply depreciating a business aircraft and deducting the associated aircraft operation expenses do not automatically expose the tax return to an audit. If such were the case, I would be defending hundreds and hundreds of IRS examinations annually, as every single client we advise does operate and deduct expenses related to a business aircraft.
Having said that, some reporting scenarios can indeed put a spotlight on generous aircraft depreciation and deductions. My job as a planning advisor is to ensure that my clients do not utilize such ownership structures and reporting scenarios. For example, reporting a sizable tax loss on a Schedule C (sole proprietorship) with only the aircraft deductions and depreciation is known to be “red flag”. On the other hand, aircraft activity and deductions reported within a profitable business income tax return will not draw as much attention from the IRS.
PASSING THE SMELL TEST
A business does need justification to write off an aircraft. A local car dealership or a family practice doctor with only one location or a local clinic will be hard-pressed to prove that a business aircraft can meet the ordinary and necessary standards for business tax deductions. A multi-state car dealership or a medical group operating a business aircraft to travel between multiple locations, however, will easily pass the justification test.
In the current pandemic environment, there is an argument made that a business aircraft is becoming a necessity to safely transport employees due to limited airline services and the inherent health risks with airlines travel.
IF YOU GET AUDITED…
Many factors will influence the outcome of an IRS audit and how the process plays out. A young and eager to impress auditor who has little to no prior aircraft audit experience can lead to a difficult audit with many questions, adjustments and disallowance on the initial examination. Often, the examination will be petitioned to the IRS Appeals Office and a reasonable resolution can be achieved with a more seasoned appeals officer.
The best defense for an IRS audit is also the simplest – to keep good records. We emphasize to our clients the importance of having detailed tax flight logs to support the business use of an aircraft. A well-documented tax flight log will create a positive impression to the auditor who will likely take a less in-depth and less detailed approach to the audit.
TAX FLIGHT LOG
Our motto is “there is no such thing as too much documentation.”
Emails, calendar entries, meeting agendas and other documents and records kept contemporaneously are the most effective supporting documents that should be kept and be available to the IRS auditor. The tax code requires that passengers be classified based on the reason he or she travels on the company aircraft. Classifications include business travel, non-deductible entertainment travel, or deductible personal non-entertainment (PNE) travel.
In closing, a properly crafted business aircraft ownership plan can result in significant income tax savings to the business owner. Detailed documentation can help a taxpayer prevail in case of an IRS examination. Business owners should review their operations and seek professional guidance to determine if business aircraft should be utilized to help manage and grow their business.
About the Author:
Daniel Cheung, CPA co-founded Aviation Tax Consultants, LLC in 2003. He is a frequent speaker at industry events on aviation tax topics. Daniel grew up in Hong Kong, has been a naturalized Hoosier since 1985 and relocated to Phoenix, Arizona in 2019.
Aviation Tax Consultants, LLC assists taxpayers in acquiring business aircraft in a tax efficient manner. Our consulting services include maximizing income tax savings, controlling the cost of personal use of the aircraft, the elimination or reduction of sales and use tax at the time of purchase, and compliance with Federal Aviation Regulations. ATC has offices in Columbus, Indiana and Scottsdale, Arizona.