Spring 2013 issue of Horizons

FEATURE

Final Regulations The final regulations provide that expenses for entertainment use of an employer-provided aircraft by a “specified individual” are disallowed except to the extent of the amount treated as compensation to the specified individual or to the extent that a specified individual reimburses the taxpayer for that flight. A “specified individual” is generally an officer, director, or more than 10% owner of an S, C, or personal service corporation (or for a partnership, any partner that holds more than a 10% equity interest in the partnership, general partner, officer, or managing member). Expenses Subject to Disallowance A taxpayer must take into account all the expenses of operating the aircraft (including all fixed and operating costs). These expenses include:

basis over the class life of an aircraft for all of the taxpayer’s aircraft for the current year and all future years when calculating the amount of disallowed expenses. This could help to reduce the disallowance, for instance, in a high personal-use year that is also an earlier year of ownership of an aircraft that is depreciated under more accelerated methods. Also, the final regulations provide that the basis of an aircraft is not reduced for the amount of depreciation disallowed by these rules. Another favorable provision applies to situations where an aircraft is leased out for third-party charter use. Many times a company that owns a plane, but does not use the plane to its maximum capacity, may wish to defray some of the aircraft’s operating cost by making the plane available for third-party charter use. Expenses allocable to a lease or charter of an employer’s aircraft to an unrelated third- party in a bona-fide business transaction for full and adequate consideration are not taken into account for purposes of the deduction disallowance calculation. Allocation of Expenses Among Various Uses to Determine Amount Disallowed The final regulations provide two methods to allocate expenses to personal entertainment flights provided to specified individuals. Whichever method is chosen, the taxpayer must use the chosen method for all flights of all aircraft for the taxable year. ∙ Occupied Seat Mile / Hour Method A taxpayer may allocate expenses for each taxable year using either occupied seat hours or occupied seat miles flown by the aircraft. In general, taxpayers must aggregate all fixed and variable expenses to determine the total expenses paid or incurred during the taxable year and divide the amount of total expenses by total occupied seat hours or occupied seat miles flown to determine the cost per occupied seat hour or occupied seat mile.

∙ Salaries for pilots

∙ Maintenance personnel and other personnel assigned to the aircraft

∙ Meal and lodging expenses of flight personnel

∙ Take-off and landing fees; costs for maintenance and maintenance flights; costs of on-board refreshments, amenities and gifts

∙ Hangar fees (at home or away)

∙ Management fees

∙ Cost of fuel, tires, maintenance, insurance, registration, certificate of title, inspection, and depreciation

∙ Interest on debt secured by or properly allocated to an aircraft

∙ Costs paid or incurred for aircraft leased, or chartered, to or by the taxpayer

The regulations contain a couple more favorable provisions with regard to depreciation. A taxpayer can elect to calculate depreciation on a straight-line

page 16 | horizons Spring 2013