Deducting Business Use of Aircraft

Deducting business use of an aircraft is not too much different than deducting the costs of a company owned vehicle. It pretty much follows the same rules.  The hard part is to be able to substantiate those deductions.

One of the most important questions that must be addressed is when the cost of private aviation is considered an ordinary and necessary business expense. If business is typically conducted locally, or business travel is between major cities that are regularly served by the major airlines, it may be difficult to justify the cost of private air travel as an ordinary and necessary expense of the business.  A better argument exists when the business requires flights to out-of-the-way locations without ready commercial air service, the timing and duration of business flights are unpredictable, or personal security is a significant concern.

Once the ordinary and necessary requirement is met, the next issue is to determine which costs are deductible and which are not. If the aircraft is owned by an entity (other than a Single Member LLC owned by an individual), costs need to be apportioned to each passenger on each flight and then allocated between business and personal (which includes personal non-entertainment and personal entertainment). If the aircraft is owned by an individual or through a Single Member LLC, there is a different allocation methodology to determine any expenses that may not be deductible.

You can depreciate some or all of the plane’s purchase price.  To qualify for the deduction, you must use the airplane in the operations of your business. The amount that you can write off is determined by the price of the airplane and the percentage of time the plane is used for business purposes. The IRS allows you to claim depreciation only for the portion of the time the plane is used for business. Aircraft deductions are usually sizable which means there may be some strings attached.

Internal Revenue Code Section 274(d) provides that a deduction is not allowed under Code Section 162 or Code Section 212 for traveling expenses, entertainment, gifts, or listed property unless the taxpayer substantiates each element of an expenditure or use of property by “adequate records” or by “sufficient evidence corroborating the taxpayer’s own statement.” An adequate record that substantiates the business or investment use of listed property generally must be written on paper or recorded in electronic form. A diary, expense report, trip sheet, or similar record must be prepared or maintained at or near the time of the expenditure or use. For example, a log maintained on a weekly basis, which accounts for use during the week, shall be considered a record made at or near the time of such use. After the fact creation of logs (in response to an audit), is frowned upon by the courts. Pilot logs are simply not adequate for this purpose.

Under the Tax Cuts and Jobs Act (TCJA), deductions for aircraft have become limited and more complicated. Under prior law, the Internal Revenue Code provided that employers would be allowed deductions for operating privately owned aircraft attributable to business flights, with a generous deduction for personal non-entertainment flights, and a general dis-allowance of costs attributable to personal entertainment flights. The Tax Cuts and Jobs Act has now significantly eliminated, or reduced, the ability for employers to deduct aircraft costs attributable to flights for business entertainment and certain personal non-entertainment employee flights.

Under prior law, travel to a location (vacation or non-vacation) could be treated as a business flight even if the travel involved entertainment so long as the travel met either the ‘directly related’ or ‘associated with’ test under section 274. Under the TCJA, expenses attributable to entertainment activities will now be non-deductible, whereas in the past they were 50 percent deductible.

Given the complexity of the rules and the dollar amounts at stake, in the year of acquisition the aircraft should not be used for any personal, non-business use and, to the greatest extent possible, the taxpayer should avoid any possible entertainment or commuting use.

There is an easier way, use the standard mileage rate. The standard mileage rate deduction is $1.21 per statute mile for 2018.  This by far is the easiest method and best method if you own an aircraft personally and only occasionally travel for business. Keep in mind, you are still subject to the ordinary and necessary rules discussed earlier.

As always, if you have any questions regarding aircraft deductability, please feel free to contact me.