The Tax Cuts and Jobs Act has provided an incredible opportunity for business aircraft owners to purchase aircraft, both pre-owned and new, to begin or strengthen their fleets. Aircraft placed in service in 2018, and the next four years moving forward, even in the final days of the year, may be eligible for 100% bonus depreciation – a deduction of the full aircraft purchase price – provided that the aircraft meets the qualified business use requirements outlined in the statute and regulations. Assuming you have sought the opinion of experienced aviation counsel in acquiring the aircraft and structuring the purchase, what comes next? What will a qualified tax preparer be looking for in completing the tax return? What will the Internal Revenue Service look for if the return is selected for audit? The answer is relatively simple. Beyond any purchase documents used to establish basis, as well as material participation logs if relevant, for a taxpayer with an appropriately structured acquisition and planned use profile, the central IRS inquiry will focus on the aircraft flight logs.
Flight Log Records Are The Essential Measure
Why are Flight Logs Important?
There is an old joke in the accounting world that the IRS mantra should be, “T & E and out by three.” What does this mean? Simply that travel and entertainment expenses are an easy way for the IRS to locate potential audit adjustments because of the onerous record keeping requirements. Because aircraft are both listed property AND subject to additional regulatory scrutiny pursuant to specific regulations under 274-10, business aircraft owners simply must keep detailed records of the aircraft use or the deductions will not be allowed. Lack of adequate flight records is by far the leading cause of disallowed expenses. See, e.g., Lysford v. Comm, TC Memo 2012-41 (disallowing expenses for a Cessna 182 based on inadequate flight records). In a judge’s decision-making as to whether a trip will be considered business or non-business, the playing field is not level. The taxpayer bears the burden to produce records that meet a specification set out in the tax code. A common, but false, line of thinking for business people prior to experiencing an audit goes as follows: “If I take a trip this year, and I file my taxes next year, whatever audit occurs will not happen until two or three years in the future, and at that point it will be very difficult for the IRS to prove that my trip was not business.” This thinking relies on the false assumption of even footing.
The courts dispel the level-field assumption with an oft-repeated phrase from the case law: that “deductions are a matter of legislative grace.” This phrase means, in effect, that taxpayers have no basic right to their tax deductions. They are only available if Congress specifically enacts them and the law can place byzantine limits and restrictions on what taxpayer must do to receive them. The travel substantiation rules are just such a restriction. Fortunately, the information they require taxpayers to retain is narrow and specific. Taxpayers armed with this knowledge, and who keep to good habits, should have no difficulty overcoming this hurdle.
What Should the Flight Log Include?
In a world of safety checklists and FAA mandated pilot logbooks, keeping comprehensive contemporaneous flight records need not be difficult, it simply needs to be folded into the routine each time the aircraft flies. Regulation 274-10, when used for further refining of the listed property rules, helps indicate information that should be included in the flight records. As a starting point, tax flight logs require much of the same information a pilot in command would typically log in a pilot book pursuant to 14 C.F.R. 61.51: flight time, departure and arrival location, and identification of the aircraft. Additionally, the records should indicate the number of passengers and their relationship to the flight by passenger, the purpose of the trip by passenger, and the company operating the aircraft and its relationship to the aircraft ownership entity. In order to properly prepare the tax return for the entity that owns the aircraft, as well as any entity that operates the aircraft (these many or may not be the same taxpayer), a tax preparer will need the identity of every passenger, usually kept in a central manifest, and their relationship to the aircraft owner or ownership entity. Expenses associated with the flight should be recorded, with supporting documentation retained, but they need not appear by flight on the log. Only with this information by flight can the return be properly prepared.
How Can my Flight Log Tool Work for Me?
Given that adequate logs are a prerequisite to business aviation tax compliance, it is important to make sure that you are working with an interface that allows your tax preparer to make all of the appropriate calculations necessary to prepare the return. While you are the only one that can provide much of the detail required to keep adequate records, you want to make sure the information you provide is adequately evaluated, and if possible, you can avoid being required to duplicate information in multiple locations. Three important capabilities you want your log tool, or the advisor preparing your return, to have are: 1. preparing different disallowance computations for each entity that either owns or operates the aircraft, consistent with Regulation 274-10, 2. computing any qualified business use limitations triggered by related party leasing pursuant to I.R.C. Section 280(f), and 3. the ability to apply multiple methodologies to the disallowance computation to minimize the impact of disallowed use. Some firms provide complete flight log software with all of these capabilities while others may encourage you to purchase a commercial product on line to track flights. While a flight log tool may not be the most exciting item to evaluate before choosing an advisor, asking about the capabilities above can give you a good sense of your preparer’s ability to maximize the value of the records you are keeping.
Is it worth it?
Does the detail of the information required make your head spin? I often have clients new to business aviation ask me whether the deductions are “worth it.” Only you can determine the answer to that question, but the ability to take deductions for general aviation business expenses saves many businesses millions of dollars each year, allowing further investment in research and development, staffing, and other business needs. Working with a trusted and competent advisor, coupled with the willingness to invest a few extra minutes a flight in record-keeping time, can mean a successful business that is powered by general aviation for years to come.
Suzanne Meiners-Levy, Esq.
Advocate Consulting Legal Group, PLLC is a law firm whose practice is limited to serving the needs of aircraft owners and operators relating to issues of income tax, sales tax, federal aviation regulations, and other related organizational and operational issues.
Tax Disclosure. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under tax laws, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.