Employers that own aircraft and find the tax treatment of their use complicated did not see much relief from final regulations IRS issued Aug. 1 in T.D. 9597. The final regulations on the operation of company aircraft leave intact many of the limitations to deductions contained in regulations it issued in 2007. In the end, IRS made few of the concessions requested by those who submitted comments after the regulations were proposed.
The new regulations went into effect Aug. 1, 2012, and apply to taxable years beginning after that date. The final rules, which fall under tax Code Section 274, do the following:
- determine how much of the expense of running a corporate airplane can be deducted;
- affect how employers tabulate income inclusion for personal use of the company plane; and
- subject security-related travel to the Section 274 deduction disallowance.
The final rule also provides an illustration of how to allot disallowance amounts on a pro rata basis across the expenses of operating the aircraft. This includes calculations of amounts employees who use the aircraft for entertainment purposes reimburse to the employer, and amounts the employer treats as compensation. Treas. Reg. §1.274-10(e) contains the illustration.
Under the final rule, expenses that can be allocated to the lease or charter of an aircraft to an unrelated party in a bona fide business transaction for the lease or charter period are not subject to the expense disallowance.
Aircraft owners also will want to review the provisions in the final rule that address depreciation. The rule allows aircraft owners to compute depreciation expenses on a straight-line basis for all of its aircraft and all taxable years for purposes of calculating expenses subject to disallowance, even if the owner uses another method to compute depreciation for other purposes.
Taxpayers did get one bit of clarification they requested during the period of comment before the final rules were issued. Aircraft owners had some concerns about changing depreciation methods under a transition rule that the IRS had put in the proposed regulation in 2007. A commentator said that changing the method “may result in disallowing more than 100 percent of the cost of the aircraft.” The final rule clarifies that in any taxable year, the depreciation disallowance does not exceed the amount of otherwise allowable depreciation. “Thus, the sum of the allowable depreciation and the depreciation disallowed will not exceed 100 percent of basis, regardless of the taxable year a taxpayer makes the straight-line election,” the preamble states.
Finding out More
Treas. Reg. §1.274-10(e) can be viewed in the final regulation. The Government Printing Office publishes the Code of Federal Regulations, which includes Treasury Regulations, on its website at http://www.gpoaccess.gov, but the version published on the GPO website usually ia available several months later.
For additional information about fringe benefits, see Thompson’s employee benefits library, including the Employer’s Guide to Fringe Benefits.