On January 2, 2013, Congress completed passage of a bill addressing, at least in part, the so-called “fiscal cliff” of impending tax changes slated to occur at the end of 2012. President Obama is expected to quickly sign the package into law. Of particular interest to those acquiring aircraft in 2013 or 2014, the law will extend the purchasing incentive of bonus depreciation, making it broadly available in 2013, and available to certain aircraft acquired in 2014 pursuant to contracts entered into this year.
On August 1, 2012, the Department of Treasury published final regulations addressing the negative tax impact of entertainment use of business aircraft. These new regulations solidify into law a legal framework first discussed by the IRS in a 2005 published notice, and later expanded upon in a 2007 set of proposed regulations. Although these rules are complex and address a variety of topics, in this author’s view, the primary, noteworthy feature of the new regulation and its antecedents is a legal framework (referred to here as the “occupied seat rule”) which deals with how much aircraft expense is attributed to entertainment passengers onboard flights that are primarily flown for business purposes,
Economic Stimulus Incentives Apply to 2012 New Business Aircraft Deliveries
New aircraft purchases and new equipment purchases for used aircraft are subject to a special 50% bonus depreciation allowance in 2012. In certain cases, depending on the details of the contract through which the 2012 aircraft is acquired, the bonus depreciation may be enhanced to 100% of the aircraft or component cost. The additional first year depreciation deduction is allowable both for regular income tax purposes and alternative minimum tax purposes.
“T and E and out by three,” is a long-standing adage among IRS agents, reflective of the fact that Congress has elevated the recordkeeping requirements for travel and entertainment expenses, and auditors honed-in on these technicalities may be able to make quick adjustments leading to hefty tax bills. The rules do not uniquely target aircraft. Instead, all travel deductions—irrespective of the means of transportation—are subject to enhanced documentation requirements. Failing to meet these technicalities can mean disallowance of expense deductions,
A federal excise tax of 7.5% (plus a small, per-head fee) applies to amounts paid for transportation by air if the trip begins and ends within the United States, or in Canada or Mexico within 225 miles of the US border. Because aircraft operations require specialized skill and knowledge, it is not uncommon for aircraft owners and lessees who operate aircraft to retain the services of experts to assist them in safely and appropriately using their aircraft.