Rates are based on January 2012 to June 2012 factors.
COMPENSATORY PERSONAL USE – A company may compensate its employees in a variety of ways. Packages typically include cash wages, as well as fringe benefits such as health insurance, retirement plans, etc. The law also provides the ability to give compensation in the form of access to transportation, such as company cars or aircraft.
Compensation in the form of personal use of a company aircraft is particularly attractive because the government allows favorable treatment to the recipient. The normal rule for most fringe benefits is that the recipient must recognize taxable income equal to the excess of the fair market value of the benefit receive over the amount the recipient paid for the benefit. However, specifically in the case of aircraft, the government allows an election for the company and the recipient to value the benefit without having to make a case-by-case assessment of fair market value. Instead, the amount recognized as income is determined with a formula benchmarked by the Treasury Department to the cost of airline tickets, adjusted with a multiplier. This special method is known as the “Standard Industry Fare Level” method (or “SIFL”).
Every six months, the IRS makes an evaluation of airline ticket trends and publishes new numbers to use in applying this formula. The formula requires taxpayers to consider the size of the aircraft, the distance traveled, the date of the flight, the number of passengers, and the role of each passenger with respect to the company (high-up company officials are taxed at a higher rate).
A common misunderstanding in this area is that, when a passenger tags along for personal reasons on a trip that the company aircraft would have taken anyway, that passenger has received a fringe benefit because he or she has not had to purchase an airline ticket. The IRS requires that this benefit be calculated and taxed; thus, SIFL is not only for trips that would not have flown without the personal element, but also (subject to some exceptions) for people tagging along for personal reasons on a business trip.
The SIFL rule imputes income in two steps: a mileage charge, and a terminal charge. The mileage charge is based on the gross take-off weight of the aircraft and the distance traveled. Both the mileage charge and the terminal charge are adjusted every six months. The following is a rough estimate of the per-passenger compensation charge for various aircraft:
Charge per mile
< 6000 lbs. - example: all single engine piston aircraft, light piston
twins, Piper Meridian, TBM 700, Eclipse 500
6001 - 10,000 lbs. - example: Cessna 402, Piper Navajo, Cessna
Caravan, Pilatus PC12, Citation Mustang, Embraer Phenom 100
10,001 - 25,000 lbs. - example: Beech King Air, Citation CJ
Citation X, Learjets
> 25,000 lbs. - example: Gulfstreams, Challengers, Falcons
The terminal fee does not vary based on size of the aircraft and is approximately $40 per leg per person.
When an aircraft-use compensation structure is used to provide personal trips of a non-entertainment nature, and the compensation involved is reasonable in amount, this approach can often create substantial tax savings. The below illustration assumes an individual who is the 100% owner of an S corporation which owns an aircraft and flies it 150 hours per year, of which 50 hours are personal but not entertainment. It compares, for two different aircraft, the tax effect of flying the personal hours under a reasonable compensation package versus flying them under a purely personal, non-compensatory approach, which would result in pro rata disallowance of aircraft expense deductions. The assumed usage profile has each flight as a two-hour leg carrying two passengers. The table below illustrates the difference between a pro rata disallowance and a compensatory charge for two different aircraft.
Piper Saratoga $500,000
Gulfstream G400 $30,000,000
Depreciation (5-year average)
Variable cost (150 hours)
Interest cost (90% financing @ 6%)
1/3 potential disallowance
Total per person charge
Imputed income for 50 hrs (25 trips)
Potential tax savings
The Internal Revenue Service has issued proposed regulations that deal with entertainment flights by specified individuals. These regulations contain significant guidance, but hint of substantial potential changes. All aircraft operators have a duty to keep contemporaneous records as to the business purpose of the trip: who traveled on the aircraft, and any person visited during the trip. These records should also clearly indicate the nature of the personal use of the business aircraft; deductibility may be determined by documentation.
For additional information on the IRS proposed rules see - Webinar - Proposed Rules on Personal Entertainment
Article Updated: March 29, 2011
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