At Tax Reduction Letter, we are extraordinarily happy that our tax-reduction strategies have given so many of our readers the extra pocket money to purchase aircraft for their personal pleasure and business use.
While our joy stems in part from your success, in the spirit of full disclosure, we must confess that the majority of our happiness is due to the wise business sense of your purchase. The purchase, lease, or charter of an aircraft by you or the corporation you own (if married, “you” includes your spouse) opens the door to enormous benefits. We offer this article in celebration of the twin American birthrights of flight and tax deductions.
As usual, lawmakers and the IRS are not as keen on the tax benefits as we are. The American Jobs Creation Act of 2004 reversed the favorable aircraft deduction strategies identified in Sutherland Lumber-Southwest. The year after this tax act, the IRS issued notice 2005-45, which restricts certain aircraft deductions, requires specific treatment of business owners, and requires stricter, more detailed records of aircraft use. Despite these restrictions, you can still put money in your bank account by making the aircraft rules work for you. Read on to see how.
1. New Requirements for Keeping Track of Aircraft Use
Your aircraft ownership, lease, or charter is subject to the listed property rules, which, when boiled down, simply state that if you have no log of business use, you will get no deductions.
But your log may not be willy-nilly. IRS notice 2005-45 contains major changes that affect how you must keep your aircraft records, including
new rules that require you to track use by occupied seat hours or occupied seat miles;
new treatment of business owners who own 10% or more of the business; and
no more free rides by your spouse and family (the new rules treat that use as a seat use by you).
Example. Say you, your spouse, and one employee take a six-hour round trip to a distant city. If you select the seat-hours method to track aircraft use for the year, you must account for 18 hours of use on this trip (three passengers times six hours).
If the round trip is 1,100 miles and you use the seat-miles method, you must account for 3,300 miles on this trip (three passengers times 1,100 miles).
Your records must account for up to five different uses of your aircraft:
Employee use (including how you considered that use as compensation to the employee in your payroll records or received reimbursement from the employee for the cost of that use).
Business use for other than business entertainment.
Business use for business entertainment.
Corporations and partnerships also need to account for personal use for ... Log in to view full article.