NEWS & EVENTS


PERSONAL USE OF CORPORATE AIRCRAFT

On occasion a company’s aircraft may be used for non-business use. Of course this is purely a hypothetical situation because as we all know company aircraft are always used for business. But in case you ever encounter this situation, the IRS has rules on how to handle it.

These rules are intended to be used by the taxpayer to determine when transportation is taxable and the fair market value. Once the value has been determined the dollar amount can either be considered additional gross income, or the employee can pay that amount, according the IRS. However, the Federal Aviation Regulations (FAR 91.501(b)(5)) strictly prohibit the reimbursement for personal transportation on a corporate aircraft. (FAA Chief Counsel Opinion 8/93). So to maintain compliance with both the FAA and the IRS the value of the transportation should be added to the employee’s income. The IRSs method of calculating a fair valuation on non-business use of an employer provided aircraft is the “Noncommercial Flight Valuation Rule” (IRC 1.61-21(g)), otherwise known as the “SIFL” rule or the “Charter Valuation Rule”. This rule may be used to value flights on all types of aircraft, including helicopters, as well as international flights. This rule is also used to value flights on charter aircraft as long as the air transportation is not sold on a per seat basis.

In general, if an employee is provided a flight on a company aircraft, the flight is potentially taxable to the employee. This also applies to non-employee guests or family members of an employee whose flight value will be imputed on the income of the employee who invited (authorized) them on the aircraft. But take note, the value of a flight for an individual who is less than two years of age is deemed to always be zero.

The definition of a flight is as follows:

     -The distance in statute miles;
     -From where the individual boards the aircraft to where the individual deplanes;
     -On a passenger by passenger basis; and
     -With a roundtrip consisting of 2 flights.

In addition, mileage attributable to an intermediate stop will not be considered. If a landing is required due to weather conditions, refueling, or other services related to the aircraft, or for any other purpose not related to the personal business of the employee, family member or guest, that landing is considered and intermediate stop. This rule applies to the personal flights on board a company aircraft, but sometimes these flights can be a combination of both personal and business. What do you do now? Well, as you have probably guessed the IRS has rules for that too. If the employee’s flight is primarily for the employers business, the employee must include in income the excess of value of the trip if no personal travel had occurred. For example, value of the total trip, minus the cost of the business flights, the remainder is the amount to be added to the employee’s income. If the employee’s flight is primarily for personal the value to be added to the employee’s income is the value of the personal legs as if no business travel had occurred.

A very key element involved when calculating the value of personal use of a company aircraft is whether an employee is classified as a “control” employee or a “non-control” employee. A non-control employee is simply an employee who is not a control employee.

However, a control employee is defined as: a) A board member or shareholder (appointed or confirmed), or elected officer of the employer, limited to the lesser of - One percent of all employees, or 10 employees; B) An individual who is among the top 1 percent most highly paid employees of the employer, limited to a maximum of 50; C) An individual who owns 5 percent or greater equity, capital or profits in the employer; or D) A director of the employer. (IRC 1.61-21(g)(8))

This is just the basis for making the determination and since these rules are complex and knowledge of the complete corporate structure is needed to make a determination of which employees are control employees, it is suggested that you have your attorneys determine who, within the corporate structure are control employees, and have this list updated regularly.

In addition, an employee is defined as: 1) an individual who is employed by the employer, 2) an individual formerly employed by the employer who separated by reason of retirement or disability; or 3) a widow or widower of 1 or 2. Also, any use by a spouse, dependent children or guest will be treated as use by that employee. What that really means is that if the spouse of an employee is on board the aircraft, the value of the flight would be the same as if the employee had been on the aircraft for personal use.

Another element in valuing personal use of an employer provided aircraft is the “seating capacity” rule, otherwise know as the 50 percent rule. Basically what this means is that if 50 percent of the seats on the aircraft, that are legal for take off, are occupied by individuals who are traveling for business of the employer, then someone occupying an empty seat could realize a zero valuation. A zero valuation means, that certain individuals are able to fly for free if the 50 percent rule is met. However, the only individuals who can receive this benefit are employees, spouses and dependent children. Remember that a dependent child is one that you can claim as a deduction on your taxes. If a guest, someone who does not qualify as an employee, spouse or dependent child, is on board the aircraft when the 50 percent rule is met, they cannot realize a zero valuation, however, their trip is valued using the non-control employee multiple. It should also be noted that seats occupied by the flight crew are not counted when determining the seating capacity of an aircraft. In addition, the number of seats on an aircraft must be in place for a 24- month period, you cannot arbitrarily remove and replace the seats. (IRC 1.61-21(g)(12))

Spouse Travel
If a spouse, dependent or companion are traveling on board the company aircraft, they are not on business of the company, unless: (1) they are an employee of the employer, (2) they are traveling for a bona-fide business purpose, or (3) their expenses would otherwise be deductible. (IRC Section 274(m)(3))

The IRS over the years has taken the position that expenses attributable to a spouses travel are not deductible unless it can be shown that the spouses presence on the trip had a bona-fide business purpose.

So what is a bona-fide business purpose?

     1. The spouses presence is necessary and not merely helpful
     2. The services of the spouse must augment the purpose of the business trip (i.e, more than just being a companion)
     3. The spouses business presence must be substantial
     4. The contributions of the spouse must be of a nature that cannot be efficiently performed by the taxpayer alone.

What services are considered not to constitute a bona-fide business purpose?

     1. Service as a socially gracious spouse, by attending lunches and dinner with the taxpayer
     2. Staffing a convention hospitality suite
     3. Serving as a hostess at dances and receptions
     4. Assisting the taxpayer in fraternizing or becoming acquainted with other business associates.

So how can a bona-fide business purposed be sustained?

     1. Formally hire and compensate the spouse for significant services rendered
          a. Have the spouse perform significant services that would otherwise have required a paid employee.
          b. Document the responsibilities of the spouse during the business trip
     2. Include the spouse in business as well as social functions
     3. Establish a written company policy the required the spouses presence.

As you can see, it can be very difficult to justify, for IRS purposes, that a spouse is traveling on business of a company and that there may be the need for the establishment of a written policy on how spouse travel will be handled. Security Rule (IRC 1.132-5(m))

If an employee falls under the “Safe Harbor Rules” then they can use a 200 percent multiplier when calculating personal use of an employer provided aircraft. This can produce significant savings if using aircraft that weigh more than 10,000 pounds.

However, the employee must be part of an overall security program. An overall security program is defined as a program in which security is provided to protect the employee on a 24-hour basis. Therefore, an overall security program is deemed to exist, with respect to an employee, if the following are satisfied:

     1. A security study is performed with respect to the employer and the employee by an independent security consultant
     2. The security study is based on an objective assessment of all facts and circumstances
     3. The employer applies the specific security recommendations contained in the security study to the employee on a consistent basis.

If family members are traveling with a qualified employee, then is deemed that a security concern exists with the family members as well. However, if the family members are traveling without the qualified employee then a security study must be obtained for them as well. Also, a security study may suggest that only travel to certain areas qualifies for the security program.

Remember, we are talking about personal use of employer provided aircraft and that generally family members would not accompanying an employee to sensitive areas of the world for personal reasons.

Now how do we value these flights. First we need to understand the parts of the formula.

Really there are only two parts, the Aircraft Multiples, which never change and the Standard Industry Fare Level (SIFL) rates which change every 6 months1.

The Aircraft Multiples are based on the maximum certified takeoff weight of the aircraft and type of employee.

Maximum Certified
Take-off weight
Aircraft multiple for a
control employee
 Aircraft multiple for a
non-control employee
6,000 lbs or less 62.5% 15.6%
6,001 to 10,000 lbs 125% 23.4%
10,001 – 25,000 lbs 300% 31.3%
Over 25,001 lbs 400% 31.3%


The SIFL rates are calculated by the Department of Transportation (DOT), determined by the cost per passenger seat mile and are revised semiannually.

The SIFL rates for this period (1/1/01 – 6/30/01) are:
0 – 500 miles $0.1961
501 – 1500 miles $0.495
Over 1500 miles $0.1437
Terminal charge $35.84


The terminal charge is not a landing fee or a user charge levied by an airport operator, but is a base amount covering certain fixed expenses that are incurred when providing a seat to a passenger.

Under the valuation rule, the value of a flight is obtained by using the aircraft valuation formula (also known as the SIFL formula). This is done by multiplying the Standard

1 NBAA publishes these twice a year.

Industry Fare Level (SIFL) rates by the mileage attributable to the flight, then multiplying that product by the appropriate aircraft multiple and then adding in the terminal charge.

The following is a hypothetical flight:

KNOWN

     1. Destination - The flight is going from Berkley Springs, WV to Orlando, FL, for arguments sake we will say that this is about 1,000 statute miles
     2. Number of people on board – let’s assume it is the CEO and her husband.
     3. Aircraft - A Cessna Citation Bravo weighs 14,800 pounds
     4. Type of employee - And since we are dealing with the principal we will assume that she is a control employee.
     5. Aircraft Multiple - Based on the aircraft valuation formula for a control employee flying on an aircraft weighing 14,800 pounds the aircraft multiple is 300%.

CALCULATION

.1961 x 500 = 98.05
.1495 x 500 = 74.75
                       172.80
                        x      3 (the aircraft multiple)            
                       518.40
                       +35.84 (the terminal charge)
                       554.24
                       x       2 (# of passengers)
                       $1108.48

This amount, $1108.48, is the amount that should be imputed on the CEO’s income. But what if the employee wants to pay for his non-business use of the employer’s aircraft? As you may remember from the February article, the FARs (91.501(b)(5)) strictly prohibits an employee from paying for his/her personal transportation on an employer provided aircraft.2

So what are your options if an employee wants to pay for personal transportation on the company aircraft? At this time you may want to explore the use of a Time Sharing agreement.3 A time-sharing arrangement allows a company to “wet lease” their aircraft under FAR Part 91 and the ability to recover some costs, not all. Note, that even though

2 FAA Chief Counsel Opinion 8/93 3 FAR 91.501(c)(1) as an arrangement “…whereby a person leases his airplane with flight-crew to another person, and no charge is made for the flights conducted under that arrangement other than those specified in paragraph (d) of section 91.501.”this is considered Part 91 the IRS considers this a commercial activity and although no profit is made, the commercial FET is due on the amounts paid.

Another option would be a true dry lease where by the employee would hire his/her own pilots. These pilots would have to be completely unrelated to the company that owns the aircraft.

Time-sharing or dry leasing can be handy tools when an individual wants to pay for his/her personal use of the aircraft, however, if these are option that you might want to consider you should consult with someone who is knowledgeable of the application of the FARs and IRS rules to your specific situation.

 

Written By: Nel Sanders