As the costs, inconvenience, and safety concerns of commercial flights continue to rise, many people and businesses find using a private jet a better and more efficient form of transportation for business travel.
However, whether you have your private jet or are traveling on an employer-provided aircraft, the tax rules for airline expenses are complex. They should be considered before deciding on your business travel approach.
Many factors determine the deductibility of airline expenses. The basic factor is determining whether the expense is normal and necessary. In general, an expense is common if it involves a common and accepted business practice. The biggest challenge is usually checking to see if an expense is necessary. To be considered necessary, the expenditure must be adequate and useful. However, this expense shouldn't be seen as essential to be necessary, and you should help the business in some way or another. For example, if the plane offers the traveler direct access to destinations, flexible hours, and fewer overnight stays, this may be deemed necessary. The expense, in addition to being normal and necessary, must be considered reasonable. A reasonable expense is considered as one that is not luxurious or extravagant. To determine if the plane's cost is reasonable, it is often helpful to demonstrate that the private plane saves passengers a lot of time, provides additional privacy and security, and allows passengers to attend meetings and be more functional during these meetings.
One of the main considerations when testing ordinary and necessary business expenses is whether the trip's activity is the trip's primary purpose. The primary objective of a trip can be determined by factors such as:
Conference/meeting location: The conference or meeting location is another important factor in determining whether the trip is for business. For example, if the conference is held at a tourist facility, the trip's primary purpose may be more difficult to justify as a business. That's not to say that a business meeting should be held in a less desirable location, just that the Internal Revenue Service can take a closer look at a business trip taking place at a resort.
Existence of an agenda: The IRS stresses the importance of having a list and other good documents as proof that travel is business-related.
Relative time spent on work and personal activities: Time spent on work and personal activities is an important consideration in determining travel's primary purpose. For example, when a person goes to a destination and spends a week for work and five weeks for personal matters, the trip is likely to be considered personal.
The presence of the spouse or guest: if the taxpayer is traveling with his or her spouse or guests, the related travel expenses will only be deductible if the following conditions are met; the spouse or guest is an employee of the taxpayer, the spouse or guest is traveling for actual business purposes, and the travel expenses would be deducted individually by the spouse or guest. Common examples of genuine business travel include administrative duties, acting as a business manager, or attending business seminars.
Once you have completed the above tests, the next step is to calculate the deductible expenses. Whether the aircraft is operated by a single owner or an excluded entity, or whether the employer provides the flights, there are different methods of allocating the aircraft's costs.
Individual Owners/Disregarded Entities
A sole proprietor or flight refers to a flight in which an individual receives a flight for themselves on an aircraft, which is 100% owned or leased to a third party, rather than provided by an employer. Individual ownership rules also apply to flights provided by a disregarded single-member entity to its sole owner. The primary purpose of a flight determines the commercial use of a single airline flight and not by the passenger. When an aircraft is used for business purposes, the expenses are allocated based on the percentage of miles or hours flown in commercial use.
An advantage of an individual flight over a flight offered by the employer is that a guest's presence is not considered when the flight is primarily for commercial use. An important distinction between a sole proprietor's flight and an employer-provided flight is that an airline alone cannot deduct personal flight costs. Also, national income rules generally do not apply to individual flights, as there is no employer-employee relationship between the passenger and the aircraft supplier.
Employer-Provided Flight
Usually, when an employer offers a personal flight to an employee, the flight value should be reported as an additional taxable benefit for that employee. For an employer to properly allocate deductible and non-deductible expenses, they must divide the flights into the following three categories:
Business flights: if a flight is considered normal and necessary for the company's normal operations, then the flight will be considered a business trip. When a flight is considered a business trip, all allocated expenses are generally deductible.
Personal and entertainment flights: Expenses allocated to an employer's personal and entertainment flights are not deductible. Suppose a key employee is stealing for personal and entertainment purposes. In that case, the flight cost is deductible only to the extent that the employee was billed to employees for the flight's cost or reimbursed the employer for the cost of the flight's fair value cost. The employer's calculations must cover all costs and use either the occupancy method or the flight-to-flight method. Both methods allocate costs based on the purpose of each passenger's trip, not the purpose of the flight. Additionally, both methods can be calculated using hours or miles. The employer can then do the calculations in different ways (in hours and miles) and use the result that produces the best result.
Personal non-entertainment flights: Personal non-entertainment flights, such as day trips, funerals, or trips to a consultant or doctor, are not considered for entertainment purposes. However, personal non-recreational flights are considered an additional taxable benefit for the employee. Therefore the income must be attributed to the employee, or the employer must be reimbursed for the aircraft's use. Most employers use Standard Industry Fare Level (SIFL) when collecting income from a key employee or business owner.
While private flying may be more common and affordable for business travel, the IRS often considers business aircraft deductions. Therefore, it is important to know the rules of deductibility for private jet travel and to maximize the tax deductibility of such use of the jet. Also, any refund policy must comply with the Federal Aviation Administration (FAA) rules.
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