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.