Mixed-use trip tax treatment and special depreciation election

Aircraft Club / Issue 40 /June 2015
Mixed-use trip p1 / Special depreciation election p2
Mixed-use trip tax treatment
and special depreciation
election
This month's issue of the Aircraft Club newsletter discusses the tax treatment of a mixed-use trip by
an executive employee to a single destination, and a summary of the special depreciation election
available to taxpayers with regard to the entertainment disallowance rules of section 274. Both are
noteworthy aircraft issues.
Mixed-use trips to single
destination
Cruising altitude
When an executive employee uses the company
owned aircraft for a trip to a single destination
where the executive will participate in both
business and personal activities, questions arise
as to the proper tax treatment of such flights to
the executive.
Stuck on the runway
When a trip by an executive to a single
destination is partly for business purposes and
partly for personal purposes, a determination
needs to be made whether the primary purpose
of the trip is business or personal in nature. If
the trip is determined to be primarily business,
the employer does not need to impute any value
for the flights on the employer-provided aircraft
because such trip qualifies as a working
condition fringe to the executive. However, if
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the trip is primarily personal, the employer must impute the value (e.g., by use of the
SIFL rules) of the flights on the aircraft to the executive as such trip is not a working
condition fringe.
No bright line test exists to determine whether a trip to a single destination by an
executive is primarily business or personal in nature. Pursuant to the section 162
regulations, each trip depends on the facts and circumstances of that trip. However, the
regulations indicate that an important factor in making the determination of the primary
purpose of the trip is to look at the amount of time spent on business activities during the
trip compared to time spent on personal activities.
Other factors that the Internal Revenue Service typically looks at in determining whether
such trips by executives are primarily for business or personal purposes include, but are
not limited to, the location of the trip and the presence of a spouse (or other non-business
guests). In general, the IRS views the presence of a spouse/guest and/or travel to a nice
destination, such as Hawaii, to indicate the primary purpose of the trip is personal in
nature.
Consequently, if an employer is going to treat a trip to a single location taken by an
executive using the company aircraft as primarily business where the executive will
participate in both business and personal activities as a working condition fringe,
documentation substantiating the primary business need of the trip is required.
Special depreciation election
Cruising altitude
In July 2012, the Internal Revenue Service issued final regulations on the tax treatment of
an employer with respect to certain personal use of employer-provided aircraft. The final
regulations provide that expenses for the entertainment use of an employer-provided
aircraft by a specified individual are disallowed to the employer except to the extent of the
amount treated as compensation to the specified individual or to the extent that a
specified individual reimburses the employer for that flight. For purposes of these rules, a
specified individual is generally defined as an officer, director, or a direct or indirect
beneficial owner of more than 10% of the employer.
Stuck on the runway
Typically, one of the largest expense categories subject to the disallowance for
entertainment use of the aircraft described above is depreciation expense. However, the
final regulations contain a special election a taxpayer may make to slow down the
depreciation disallowance for entertainment use of the aircraft.
With regard to depreciation, the final regulations permit a taxpayer to elect to calculate
the depreciation expense on a straight-line basis over the class life of an aircraft for all of
the taxpayer's aircraft for the current year and all future years when calculating the
amount of disallowed expenses. This election is allowed even if the taxpayer uses a
different methodology to calculate depreciation of the aircraft under other sections of the
Internal Revenue Code, such as using MACRS GDS.
For aircraft placed in service in tax years prior to the tax year of the election, the amount
of depreciation is determined by applying the straight-line method to the unadjusted
depreciable basis over the class life of the aircraft as though the taxpayer had used that
method from the year the aircraft was placed in service.
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The final regulations clarify that the amount of depreciation disallowed under this
method for any tax year cannot exceed a taxpayer's allowable depreciation for that tax
year. Under certain facts and circumstances, this election can result in less depreciation
disallowance than if the election is not made.
A taxpayer makes the election by filing a federal income tax return for the taxable year
that determines the taxpayer’s expenses subject to the disallowance rules for
entertainment use of the aircraft. Such election may only be revoked upon consent by the
Commissioner by showing compelling circumstances.
Finally, it should be noted that the final regulations provide that the basis of an aircraft is
not reduced for the amount of depreciation disallowed by these rules. Examples are
included in the final regulations to illustrate this rule.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact:
Rick Farley, New York
+1 (646) 471-4084
[email protected]
© 2015 PricewaterhouseCoopers LLP. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers (a
Delaware limited liability partnership), which is a member firm of PricewaterhouseCoopers International Limited, each member
firm of which is a separate legal entity.
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This content is for general information purposes only, and should not be used as a substitute for consultation with professional
advisors.
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