IRS Liberalizes the Method for Computing Amounts Included in Income for Personal Use of Aircraft

On June 14, 2007, the IRS issued proposed regulations under Sections 61 and 274 that liberalize the way an entity can calculate the amount of personal usage chargeable to a key employee or owner. These new rulings are very favorable to the taxpayer, owner or key employee. They will considerably lower the amount includable in compensation of the owner or key employee or lower the amount disallowed under previous guidance.

Prior to the issuance of these proposed regulations, many entities were taking into account total costs (e.g. fixed and variable and depreciation) of operating the aircraft and multiplying the percentage of total occupied seats to personal use occupied seats to compute the personal usage amount.

Under the new proposed rules, an entity may now:

  • Exclude expenses allocable to the periods that a taxpayers aircraft is chartered to unrelated parties.
  • Elect to calculate depreciation expense only for the purpose of computing personal usage on a straight-line basis.
  • Depreciation allocable to personal use flights does not reduce the basis of the aircraft for purposes of calculating future depreciation expense.
  • Deadhead flights (e.g. flights where no passengers are flying) are considered to be the same character as the previous occupied legs.
  • Aircraft used in a business entertainment setting where the flight or flights preceding or following a bona fide business discussion is not considered compensation to the owner or employees. However, the expenses are subject to the 50% limitation.
  • New option to allocate expenses using a flight-by-flight method instead of the occupied seat mile or hour formula.

Please contact Steve Singer at our office to see how these new rules can benefit you retroactively or in the future.