On February 21, the IRS announced a new campaign to increase audits of private jet usage by high-income taxpayers, large corporations, and large partnerships. This campaign aims to ensure that business deductions for private jet usage have been properly made, reflecting an ongoing IRS effort to scrutinize high-net-worth taxpayers following media criticism of increasing wealth inequality in the U.S. This follows the IRS’s September 2023 announcement that Inflation Reduction Act funding would be used to target the top 1% of taxpayers.

At the announcement for this newest campaign, IRS Commissioner Danny Werfel commented, “These aircraft audits will help ensure high-income groups aren’t flying under the radar with their tax responsibilities.”

Immediate Implications for Private Jet Owners

Private jet owners, whether individuals, corporations, or partnerships, must now work closely with their tax advisors to ensure proper compliance and reporting. The heightened scrutiny means that even the slightest discrepancies in deductions for business use of private jets could trigger audits and potential penalties.

Background

The business use of private jets has long been a fixture of the corporate executive world and remains a point of fascination for the public. The premise of deductions for business use of private jets is relatively straightforward. Under I.R.C. § 162(a), taxpayers can deduct ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, meaning that private jet costs associated with business activities can be deducted. However, muddying the waters are highly complicated legal requirements that business users of private jets allocate expenses between business use and personal use. Not only is tracking difficult and costly, but the rules and regulations defining use of jets and how to allocate time are murky and broad.

For example, under Treas. Reg. § 1.162-2(b), if a taxpayer travels to a destination and, while at the destination, engages in both business and personal activities, travel expenses to and from such destination are deductible only if the trip is related primarily to the taxpayer’s trade or business. If the trip is primarily personal in nature, the travel expenses to and from the destination are not deductible even though the taxpayer engages in business activities while at such destination. However, expenses while at the destination which are properly allocable to the taxpayer’s trade or business are deductible even though the traveling expenses to and from the destination are not deductible. This “primary purpose test” is a facts and circumstances test that is tough for taxpayers to apply and often even more difficult for accountants to track. So, hypothetically, while Taylor Swift’s private flight from the AFC Championship Game to perform in Japan would be deductible as a business expense, her private flight from Japan to Las Vegas to attend the Super Bowl, as a personal activity, would not be so deductible.

IRS Publications and Recent Developments

Perhaps surprising in light of the new IRS audit campaign, recent IRS publications have actually given some reprieve to private jet owners looking to maximize business use deductions. In particular, the IRS has offered sole proprietor businesses an easier route to determining deductibility of expenses for use of their private jet. In IRC Memorandum 202117012 (April 2021), the IRC Chief Counsel’s office concluded that a sole proprietor that owns an aircraft (either directly or indirectly through a disregarded entity) may use the primary purpose test in Treas. Reg. § 1.162-2(b)(1) to determine whether expenses for use of the aircraft by the sole proprietor are deductible, rather than the more arduous method of tracking and allocation of seat hours or miles flown as provided in Treas. Reg. § 1.274-10(e).

Apart from scrutinizing deductions for business use of private jets, it is anticipated that IRS audits will focus on other tax-efficient strategies owners use for generating deductions from their private jets. One such creative tool is the donation of a private jet, or use of a private jet, to a nonprofit organization. Under I.R.C. § 170, a deduction is allowed for the fair market value of charitable contributions. If a charitable contribution is made in property other than money, the amount of the contribution is generally the fair market value of the donated property at the time of the contribution, reduced by certain exclusions. Jet owners and fractional jet owners can get creative with charitable contributions surrounding their jets. For example, private jet owners and fractional private jet owners may donate flight hours to a medical nonprofit organization for the transportation of patients in need. Similarly, private jet owners looking for an alternative to selling their jet may look to donation of the jet itself to a charitable organization. There are additional compliance risks and reporting obligations when jet owners donate (or attempt to be reimbursed for) the use of their private jet by the jet owner’s private foundation. With its new campaign, the IRS may be on the lookout for noncompliance in charitable giving within the private jet market.

Navigating the Complexities: Essential Steps for Private Jet Owners

Given the new IRS campaign, private jet owners must take several proactive steps to ensure compliance and minimize the risk of costly audits and penalties.

1. Documentation and Record-Keeping: Owners should maintain meticulous records of their private jet usage, clearly distinguishing between business and personal use. This includes keeping detailed logs of flight purposes, destinations, and related expenses.
2. Consulting Tax Advisors: It is crucial for private jet owners to work closely with experienced tax advisors who understand the complexities of IRS regulations related to private jet usage. Advisors can help ensure that deductions are accurately reported and that all necessary documentation is in place.
3. Reviewing Past Returns: Owners should review past tax returns to identify any potential issues or discrepancies that could trigger an audit. Addressing these issues proactively can help mitigate risks.
4. Compliance with Charitable Contributions: For those who have made or plan to make charitable contributions involving their private jets, it is essential to ensure that all contributions are properly documented and comply with IRS guidelines. This includes obtaining qualified appraisals and ensuring that all necessary forms are filed.
5. Structuring Ownership and Usage: Owners should ensure that the ownership and usage of their private jets are structured in a tax-efficient manner. This may involve using entities such as LLCs or partnerships to manage the ownership and operation of the aircraft.

What to know

The IRS’s new campaign to increase audits of private jet usage represents a significant development for high-net-worth taxpayers, large corporations, and partnerships. Private jet owners must act quickly and decisively to ensure compliance with IRS regulations and minimize the risk of audits and penalties. By maintaining meticulous records, consulting with experienced tax advisors, and ensuring proper documentation of charitable contributions, private jet owners can navigate the complexities of IRS regulations and safeguard their interests.

At FlyUSA, we understand the unique challenges and opportunities associated with private jet ownership. Our team of experts is here to help you navigate these complexities and ensure that your private jet usage is compliant with all IRS regulations. Whether you need assistance with tax compliance, structuring ownership, or charitable contributions, we are here to support you every step of the way.

References

1. IRS Announces New Campaign to Audit Private Jet Usage: IRS Press Release
2. Treas. Reg. § 1.162-2(b): Cornell Law School
3. IRC Memorandum 202117012: IRS Legal Guidance
4. I.R.C. § 170 – Charitable Contributions: Cornell Law School

By understanding and adapting to these regulatory changes, private jet owners can continue to enjoy the benefits of their aircraft while staying compliant with IRS requirements. At FlyUSA, we are committed to helping you achieve that balance.