Business Aircraft Tax Audits (Deductions & Depreciation)

by | Mar 4, 2024 | Uncategorized

IRS Commissioner, Daniel Werfel recognized that much is at stake with the campaign.  The audit approach is expected to focus initially on multinational and domestic corporations, as well as complex partnerships but is expected to expand from there.



What can I do?

If you have an individual or a team that handles finances, it’s always a good time to connect with them. Now even more-so. After the first wave of audits is completed, there will be more insightful information regarding the path, scope and of intention of the IRS.

As it stands now, a review of accounting processes for your Aircraft business and non-business-related expenses and documentation processes is a good first step. The IRS will search for a bent needle in a pile of needles.

Each day brings more information, and we stand ready to provide support in all your Aviation needs.

Do We Still Have Deductions?

U.S. Code: Title 26, IRC § 162 – Trade or Business Expenses; allows deductions for ordinary and necessary trade or business expenses paid or incurred during the course of a taxable year.

Q: Was it a business expense, as the rules are complicated, and more importantly, are you prepared to back up your answer with documentation?

NOTE: This will be a key line of questioning during any Business Aircraft Tax Audit, and preparation now, not only reduces response times but will prepare you, in case you are audited now, or in future years.

What About Depreciation?

U.S. Code: Title 26, IRC §167 – Depreciation

     (a) General rule There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)

What are some Depreciation Methods?

U.S. Code: Title 26, IRC § 168 – Accelerated Cost Recovery System

     “Modified” Accelerated Cost Recovery System (“MACRS”) consists of two depreciation systems: the General Depreciation System (“GDS”) and the Alternative Depreciation System (“ADS”).

And Bonus Depreciation?

U.S. Code: Title 26, IRC § 168(k) – Special Allowance for Certain Property

     Q1: What are the eligibility requirements for the additional first year depreciation deduction following the enactment of the Tax Cuts and Jobs Act of 2017 (“TCJA”)?

     A1: The depreciable property must meet four requirements to be qualified property. These requirements are (1) the depreciable property must be of a specified type; (2) the original use of the property must commence with the taxpayer or used depreciable property must meet the requirements of section 168(k)(2)(E)(ii); (3) the depreciable property must be placed in service by the taxpayer within a specified time period or must be planted or grafted by the taxpayer before a specified date; and (4) the depreciable property must be acquired by the taxpayer after September 27, 2017.

     Q2: What Are the Specific Changes to Bonus Depreciation 168(k)?

     A2: Starting on January 1st, 2023, for assets placed in service during the following periods, the bonus depreciation percentage will decrease in the following manner:

     January 1st, 2023 – December 31st, 2023: Bonus rate is 80%

     January 1st, 2024 – December 31st, 2024: Bonus rate is 60%

     January 1st, 2025 – December 31st, 2025: Bonus rate is 40%

     January 1st, 2026 – December 31st, 2026: Bonus rate is 20%

     January 1st, 2027 & Later: Bonus rate is 0%

U.S. Code: Title 26, IRC § 168(k) Special Allowance for Certain Property – EXERPT

     (1) Additional allowance

     In the case of any qualified property-

          (A) the depreciation deduction provided by section 167(a) for the taxable year in which such property is placed in service shall include an allowance equal to the applicable percentage of the adjusted basis of the qualified property, and

          (B) the adjusted basis of the qualified property shall be reduced by the amount of such deduction before computing the amount otherwise allowable as a depreciation deduction under this chapter for such taxable year and any subsequent taxable year.

And Depreciation and Deduction Limits?

U.S. Code: Title 26, IRC § 280F – Limitation on depreciation

     Must use asset for Qualified Business Use:

          25% Test – Must pass 25% Qualified Business Use (“QBU”) test period. If not, then no MACRS/Bonus Depreciation

          50% Test – Pass 25%, then you add comp flights that were taxed properly to individuals at Standard Industry Fare Level (“SIFL”)

U.S. Code: Title 26, IRC § 183 – Activities not Engaged in for Profit (“hobby loss rule”)

     (a)General rule

     In the case of an activity engaged in by an individual or an S corporation, if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section.

U.S. Code: Title 26, IRC § 465 – Deductions Limited to Amount at Risk

     (a) Limitation to amount at risk.–

          (1) In general.–In the case of–

               (A) an individual, and

               (B) a C corporation with respect to which the stock ownership requirement of paragraph (2) of section 542(a) is met,

               engaged in an activity to which this section applies, any loss from such activity for the taxable year shall be allowed only to the extent of the aggregate amount with respect to which the taxpayer is at risk (within the meaning of subsection (b)) for such activity at the close of the taxable year.

U.S. Code: Title 26, IRC § 469 – Passive Activity Losses and Credits Limited

     NOTE: Passive losses can ONLY offset Passive gains.

U.S. Code: Title 26, IRC § 274 – Disallowance of Certain Entertainment, etc., Expenses

     (a) Entertainment, amusement, recreation, or qualified transportation fringes

          (1) In general

          No deduction otherwise allowable under this chapter shall be allowed for any item-

               (A) Activity

               With respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or

               (B) Facility

               With respect to a facility used in connection with an activity referred to in subparagraph (A).

NOTE: Even your grade-school teacher told you not to use a word in its definition, even though the government did. It’s Highly advisable to engage a Professional to assure compliance with Taxation Rules and regulations for not just “entertainment” but all Deductions and Depreciation, especially in relation to your Aircraft.

The National Business Aviation Association (NBAA) is an excellent source of information. Please visit their site as they have painstakingly assembled a useful guide for download:

NBAA Personal Use of Business Aircraft Handbook

**This is for informational purposes only and should not be construed as legal advice or direction for any particular matter or concern. Please contact us directly for discrete guidance.**