IRS Ramps Up Audits of Personal Use Deductions for Corporate Private Jet Flight Usage

IRS continues to apply more scrutiny on high-income taxpayers and announced the beginning of audits focused on the personal use of business aircraft.  The IRS announced in February of 2024 that is launching a targeted enforcement initiative focusing on business deductions claimed for private jet usage by high-net-worth individuals and large corporations. With the additional audit funding provided by the Inflation Reduction Act of 2022, the tax agency is preparing to conduct ‘dozens of audits’ to ensure strict adherence to the rules governing the allocation of private aircraft expenses between business and personal use.

Under the tax code, companies can deduct legitimate business-related expenses for assets like private jets. However, the IRS has observed widespread underreporting of the personal use of these aircraft by partners, shareholders, and executives. The upcoming audits will closely examine whether corporations, partnerships, and high-income individuals properly segregate and substantiate their private jet activities’ business versus private components.

Please accurately document and apportion flights to avoid the disallowance of deductions claimed for private jet costs. Non-compliance in this area can lead to significant tax liabilities and penalties, a risk that is now heightened with the IRS’s prioritization of this issue. This signals the tax agency’s intent to crack down on wealthy and large enterprises’ perceived abuse of business aviation deductions.     

Background 

Officers, executives, other employees, shareholders, and partners often use business aircraft for both business and personal reasons. In general, the tax code passed by Congress allows a business deduction for expenses of maintaining an asset, such as a corporate jet, if that asset is utilized for a business purpose. However, the use of a company aircraft must be allocated between business use and personal use. This is a complex area of tax law, and record-keeping can be challenging.     

The IRS is scrutinizing two main tax implications related to personal use of corporate aircraft:  

1. Imputed compensation income for personal flights:
   • This can be calculated using the flight’s fair market value (FMV) or the Standard Industry Fare Level (SIFL) rate, which generally results in a smaller income inclusion.
   • The imputed income is reported on the W-2, as a guaranteed payment, or on Form 1099 and is subject to applicable payroll taxes.
2. Disallowance of business deductions for personal use:
   • If a sole proprietorship or disregarded entity owns the aircraft, imputed income must not be computed for the individual owner.
   • However, if the primary purpose of the flight is not for business, the full deduction will be disallowed.

The IRS closely examines the proper reporting of personal use as imputed income and the appropriate allocation of deductions between business and personal use of corporate aircraft.

Taxpayers who own or use private jets should take a proactive stance 

Reviewing your recordkeeping and tax reporting practices now can ensure full compliance, even in anticipation of potential IRS scrutiny. Seeking the guidance of tax professionals can be instrumental in navigating the intricacies of correctly allocating these expenses, especially in light of the heightened IRS audits in this area.      

• Conduct a comprehensive review of past tax year deductions claimed for private aircraft use to confirm compliance with current laws and regulations. This proactive assessment can help identify any potential issues before an IRS audit.
• Gather all relevant documentation and records to calculate and justify prior deductions for private plane expenses. Thorough recordkeeping is critical to supporting the business purpose of flights.
• Partner with aviation law specialists to establish a robust documentation system for future tax years. Properly allocating and substantiating business versus personal use of private aircraft can be complex and require expert guidance.
• Seeking advice and support from tax professionals with direct experience navigating IRS audits focused on private aviation deductions can provide a sense of reassurance. Their expertise can help ensure full compliance and effectively defend against any IRS challenges, giving you peace of mind in these uncertain times.

Preemptive review, documentation, and consultation with qualified advisors can help large corporations and high-net-worth individuals avoid the IRS’s intensified scrutiny in this area.

Coinciding with the IRS’s new compliance initiative, the Biden administration has unveiled plans to make private jet ownership and operation more costly for businesses and individuals.

The White House has called for changes to the tax treatment of private aircraft in the president’s proposed 2025 federal budget, released on March 11, 2024. The budget includes provisions to alter the write-off allowances for purchases of private jets and hike taxes on the fuel used to power these non-commercial flights.

President Biden further highlighted this private aviation-focused agenda in his State of the Union address on March 7, 2024, framing it as an effort to ensure wealthy individuals and corporations pay their “fair share.”

These forthcoming tax policy modifications would significantly increase the financial burden of private jet ownership and usage if enacted. This, combined with the IRS’s stricter enforcement around deductions claimed for business use of private aircraft, signals a concerted push by the federal government to curb perceived abuse of tax advantages related to private aviation.