The rise in business aircraft purchases across the U.S. in recent years has led to company owners, management and employees using such aircraft for both business and personal purposes — often saving time, enhancing flexibility and increasing productivity. However, the IRS has taken notice.
On February 21, 2024, the IRS announced a new audit initiative focusing on business aircraft use by large businesses and high-net-worth individuals. This effort, set to commence in the near future, will dive into, and dissect the fine line between, business and personal use to evaluate whether taxpayers are properly reporting their activities. Taxpayers using any type of business aircraft should understand their reporting obligations and the potential ramifications of this new initiative.
This audit campaign aims to:
While the initiative will begin with roughly dozens of audits, there is the possibility of expansion based on the findings.
In general, it’s important to understand domestic air travel on a business’s private aircraft is placed into three categories:
Establishing whether travel is predominantly for business purposes is a responsibility that lies with the taxpayer and will depend on the specific facts and circumstances.
The tax treatment of business aircrafts is governed by a complex set of rules in the IRC. These rules cover everything from deductions for operating expenses and depreciation, to bonus depreciation and the handling of information regarding personal use of an aircraft.
Generally:
Business aircrafts may create a significant tax deduction for companies. However, accurate record-keeping that differentiates between business and personal use of the aircraft is required, and the extent of personal use can affect the deductibility regarding specific business expenses.
Historically, the IRS has not had the resources to closely monitor the often complex taxation of corporate jets and other aircraft. However, the agency plans to use advanced analytics and add more staff, thanks to funds from the Inflation Reduction Act, to increase their capacity.
With the federal funding from the Inflation Reduction Act, the examination of business aircraft usage is merely one facet of the IRS’ broader initiative to scrutinize tax compliance for high-net-worth individuals and large businesses. Other areas of interest include partnership self-employment tax, large foreign-owned corporations transfer pricing, pursuing multi-million-dollar partnership balance sheet discrepancies, prioritization of high-income cases, and many others.
The ultimate outcome of the new audit campaign and potential revenue impact remain to be seen. However, this initiative could significantly impact tax planning and compliance strategies for business aircraft owners and high-net-worth individuals in the near-term. It’s crucial these owners and their advisers understand the IRS audit procedures, plan ahead and ensure they keep the essential documentation needed to be readily available to defend their case.
Contact Joe Falbo, Dennis Szymkowiak or a member of your service team to discuss this topic further.
Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.