Best Practices for Managing Non-Business Use of Aircraft · 05/22/14 Copyright © 2014 Wolcott Aviation Seminars, LLC 13 © 2014 Wolcott Aviation Seminars, LLC 37 SIFL & Cost Disallowance

05/22/14

Copyright © 2014 Wolcott Aviation Seminars, LLC 1

© 2014 Wolcott Aviation Seminars, LLC

Best Practices for Managing Non-Business Use of AircraftIncludes References to Flight Tax Systems©

Jed R. Wolcott, CPASue Folkringa, CPA

Wolcott & Associates, P.A.

2© 2014 Wolcott Aviation Seminars, LLC

Sue Folkringa, CPA, MBACommercial Pilot, AS/MEL, Glider, Instrument

Airplane

Jed Wolcott, CPA, MBAPresident


Today’s Webinar Topics

• Using SIFL to calculate the employee fringe benefit for non-business use of company aircraft. Treas Reg 1.61-21

• Calculating the entertainment cost disallowance to the company for entertainment flights. Treas Reg 1.274

• Methods to document and track the flight data for preparation of tax returns

10400

10300

05/22/14



Why Are These Rules Important?

• Aircraft, as listed property, are IRS audit targets• Failure to follow the reporting requirements can lead

to:• Taxes and penalties to the employees using the aircraft• Reduction or even disallowance of aircraft costs and

deductions to the company• As of August 01, 2012 the aircraft flight records have

become part of the tax return


Wolcott & Associates, P.A. - What We Do

• We are an aviation-dedicated firm of CPAs and accounting professionals

• Our clients are aircraft owners, operators, and accounting firms that have aircraft owner-clients

• We specialize in the preparation of aircraft income tax returns, state tax matters, IRS audits, structuring aircraft ownership, and related aviation tax and financial matters.

• We identify, protect and preserve tax deductions for your aircraft and those of your clients!


Resource Lookup

05/22/14



Resource Materials

• Copies of today’s materials are available at our website at www.aviation-cpa.com.

• Look for the green lookup bar on the Wolcott &Associates, P.A. homepage

• This PowerPoint presentation –• You will find other Resource Material links

throughout today’s presentation

50108

50108


Flight Tax Systems – Tax Software for Aircraft Owners

• SIFL• Entertainment Cost Disallowance• Depreciation and Passive Loss Limitation • SEC & Cost Center Reporting • 3 Versions Covering All Sizes of Aircraft • Electronic Data Import from Excel, Scheduling Software:

• BART• FOS• SchedAero, Others

• For more info and to order: www.flighttaxsystems.com


Upcoming Webinars • Tax Issues for Owner Pilots: June 26, 2014• IRS Audit Issues for Aircraft Owners: July 17, 2014

05/22/14



IRS Regulations for Non-Business Use

Company

SIFL imputed income for employee & guests

Entertainment Flight Cost Disallowance

10400

10290


SIFL Rules

Reporting Taxable Income to Employees from Non-Business Use of Company Aircraft


IRS Regulations Governing Personal Use

• Reg. § 1.61-21 Taxation of Fringe Benefits• Considered a “Taxable Fringe Benefit”• Special valuation regulations exist for aircraft• SIFL (Standard Industry Fare Level) is the most popular

method of calculating the imputed income• NBAA Personal Use Handbook www.nbaa.org

10400

05/22/14



Employee Is Taxed For The Non-Business Transportation

• Non-employees, family members, or guests are taxed to the employee authorizing the travel

• The employee does not have to be on the aircraft to be taxed for the flight

• Guests of the employee are taxed at the employee’s SIFL rates.

• Children under age 2 years are never taxed


Information Required For Use Of SIFL

• Airport-to-airport (or point-to-point) distance in statute miles

• Maximum Certified Takeoff Weight (MTOW) of the aircraft• Control status of the employee• Current SIFL rates and terminal charges• Sufficient data to separate and analyze multiple legs and

passenger mix


Control vs. Non-Control Status

A Control employee:• Owns 5% or more of company, or• Paid in the top 1% of the company• Most Officers or Directors• Retired former control employees• Flights for control employees are valued at a higher

aircraft multiple than non-control employees• General rule:

If an employee can authorize a personal-use flight, the employee is probably a control employee

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Control vs. Non-Control Status (cont.)

Non-control employee:• Everyone else• Lower valuation multiple used, therefore a non-

control employee pays less tax• Note, if a non-control employee is the

guest of a control employee, they are taxed at the control employee’s rate


Aircraft Multiples

Maximum Certified Takeoff Weight of the

Aircraft

Aircraft Multiple for a Control Employee

Aircraft Multiple for a Non-Control Employee

6,000 lbs or less 62.5% 15.6%

6,001 – 10,000 lbs 125% 23.4%

10,001 – 25,000 lbs 300% 31.3%

25,000 lbs or more 400% 31.3%


Standard Industry Fare Level (SIFL) Rates

Mileage Range 1st Half 2013

2nd Half 2013

1st Half 2014

0 – 500 Miles $0.2655 $0.2654 $0.2515

501 – 1,500 Miles

$0.2024 $0.2024 $0.1918

Over 1,500 Miles

$0.1946 $0.1946 $0.1844

Terminal Charge $48.54 $48.53 $45.98

05/22/14



SIFL Formula & Example

Example flight: Employee and guest take a 3,500 mile non-business trip in a 400% aircraft:

1. Step 1 is calculate the SIFL mileage2. Step 2 is multiply the SIFL mileage charge by the

aircraft multiple (in this case X 4 for a 400% aircraft)3. Step 3 adds the terminal charge4. Step 4 multiplies the SIFL amount & terminal charge

by the number of passengers


SIFL Calculation Example

Rate SIFL

500 miles 0.2654 132.70

STEP 1 1500 miles 0.2024 303.60

1500 miles 0.1946 291.90

Sub‐Total 728.20

STEP 2 Aircraft Multiple X 400% 2912.80

STEP 3 Terminal Charge 48.53

SIFL Per Passenger 2,961.33

STEP 4 Multiply x 2 passengers X 2

SIFL Total 5,922.66


Sample Form W-2

SIFL imputed income

included in box 1

SIFL imputed income identified in box 14

$20,406.00

SIFL $20,406.00

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Exceptions and Special Rules

• 50% Seating capacity rule• Spousal travel rules• Point-to-point calculation• International SIFL rule• Bona fide security plans

10405

10102


When 50% of the Seats are filled by Business Travelers:

• Then no SIFL income is imputed for non-business travel by an employee

• No SIFL income is imputed for non-business travel by the control-employee’s spouse or dependent children

• SIFL for guests of the control employee is computed at non-control employee rates

• Applies to employees, control employee’s spouse and dependents, control employees guests, and certain other passengers


Spousal Travel Is Taxed to the Employee, Unless:

• 50% seating capacity rule is met, or• Spouse is a paid employee of the company and is

traveling for business purposes• Regulations allow for certain other exceptions, such as

chaperones and foreign language interpreters

10102

05/22/14



SIFL is Calculated Point-to-Point

• Round trip includes at least two “flights”• Intermediate stops are irrelevant in determining the

employee’s flight distances – calculate point-to-point• Deadhead flights are ignored for SIFL• SIFL flights are calculated on a passenger-by-passenger

basis

© 2014 Wolcott Aviation Seminars, LLC 26

Bob’s Trip to/from LA

KDPA [Dupage]

KHOU [Houston Hobby]

KVNY [Van Nuys]

941 sm

933 sm

KBFI [Aircraft based at Boeing Field]

Airplane’s miles traveled = 6,534

Bob’s miles for SIFL = 3,436

SIFL miles are point‐to‐pointDeadhead Leg


SIFL Calculation Caution:

• Overlooking Bob’s point-to-point routing and calculating his SIFL leg-by-leg results in Bob paying unnecessary taxes! – Taxable income from SIFL point-to-point routing = $ 317 – Taxable income from SIFL leg-by-leg routing = $ 496 – Results in additional taxable income of $179 to Bob

05/22/14



SIFL Rule for Foreign Travel in Excess of 7 Days

• Foreign travel SIFL reduction rules apply if the following two conditions are met:1. The trip outside the United States lasts for more than seven days2. At least 25% of the individual’s time on the trip is for non-

business activities (measured on day-to-day basis).

• If both conditions are met, SIFL may be reduced to the ratio of non-business days to total days

10303


Foreign Travel in Excess of 7 Days

• Travel days in and out of U.S. are business days • Weekend days are counted as business days• Any business activity taking place counts as one

business day • Note: Rule does not apply to employees or guests

traveling entirely for non-business purposes



Example• 8 day trip from NY to London• Employee on business plus spouse traveling for non-

business• Departs on Monday, returns the following Monday• Employee conducts business Thursday and Friday

– 3,500 statute miles each way– 400% aircraft– 2 days are non-business

05/22/14



Employee TotalDays

Business SIFL

Monday – Travel 1

Tuesday – Non‐Business 1

Wednesday – Non‐Business 1

Thursday – Business 1

Friday – Business 1

Saturday – Business 1

Sunday – Business 1

Monday – Travel 1

Totals 8


2 days ÷ 8 days = 25%

Employee TotalDays

Business SIFL

Monday – Travel 1 1





Saturday – Business 1

Sunday – Business 1


Totals 8

Employee TotalDays

Business SIFL






Saturday – Business 1 1

Sunday – Business 1 1


Totals 8

Employee TotalDays

Business SIFL




Thursday – Business 1 1

Friday – Business 1 1




Totals 8 6

Employee TotalDays

Business SIFL


Tuesday – Non‐Business 1 1

Wednesday – Non‐Business 1 1

Thursday – Business 1 1

Friday – Business 1 1




Totals 8 6 2


Foreign Travel in Excess of 7 DaysRate Employee Spouse

500 miles 0.2654 132.70 132.70

STEP 1 1500 miles 0.2024 303.60 303.60

1500 miles 0.1946 291.90 291.90

Sub‐Total 728.20 728.20

STEP 2 Aircraft Multiple 400% 2912.80 2912.80

STEP 3 Terminal Charge 48.53 48.53

Sub‐Total 2,961.33 2,961.33

7 Day Rule 25% 100%

Sub‐Total 740.33 2,961.33

STEP 4 Total SIFL to Employee $3,701.66

Rate Employee Spouse

500 miles 0.2654 132.70 132.70

STEP 1 1500 miles 0.2024 303.60 303.60

1500 miles 0.1946 291.90 291.90

Sub‐Total 728.20 728.20



Sub‐Total 2,961.33 2,961.33

7 Day Rule 25% 100%

Sub‐Total 740.33 2,961.33



500 miles 0.2654 132.70 132.70

STEP 1 1500 miles 0.2024 303.60 303.60

1500 miles 0.1946 291.90 291.90

Sub‐Total 728.20 728.20



Sub‐Total 2,961.33 2,961.33

7 Day Rule 25% 100%

Sub‐Total 740.33 2,961.33



500 miles 0.2654 132.70 132.70

STEP 1 1500 miles 0.2024 303.60 303.60

1500 miles 0.1946 291.90 291.90

Sub‐Total 728.20 728.20



Sub‐Total 2,961.33 2,961.33

7 Day Rule Applied 25% 100%

Sub‐Total 740.33 2,961.33



Flight Tax Systems

05/22/14



Flight Tax Systems


Flight Tax Systems


“Bona Fide” Security Programs

• Permits executive to fly on company plane for non-business flights at reduced SIFL rates

• Requires study be performed. A separate study is required for family members if they travel alone

• Must be part of a complete security program (24 hours)• Provides “Safe Harbor;” use 200% multiple regardless of

weight of aircraft– Can result in significant savings for use of large aircraft

10410

05/22/14



SIFL & Cost Disallowance Worksheet

31%

0.2312$ 0.1763$ 0.1695$ 300% 42.26$

Flt #

Leg Date From To Flight Type Hrs Statute Miles

Total Pax

Business Pax

Pers Non-Ent Pax

Entertain Pax

Exempt Spouse and Dependents

Non-Control Guests

0-500 Miles

501-1500 Miles

1500+ Miles

Subtotal Factor SubtotalTerminal Charge

Subtotal Imputed Income

Reimbursed

Entertain Seat Miles

Total Seat Miles

Entertain Seat Hours

Total Seat Hours

Entertain Miles

Entertain Hours

Flight 1: Business Flights

1 1 7/1/08 STL MDW Business 0.7 251 6 6 0.00 - - 1,506 4.2 - -

1 2 7/2/08 MDW STL Business 0.7 251 6 6 0.00 - - 1,506 4.2 - -

Flight 2: Entertainment Flights

2 1 7/10/08 STL ORL Entertainment 2.1 874 4 4 1500+ Mile 65.94 0.00 65.94 300% 197.81 42.26 240.07 960 - 3,496 3,496 8.4 8.4 874 2.10

2 2 7/20/08 ORL STL Entertainment 2.1 874 4 4 115.60 65.94 0.00 181.54 300% 544.61 42.26 586.87 2,347 2,520 3,496 3,496 8.4 8.4 874 2.10

Flight 3: Non-Entertainment Flights

3 1 8/1/08 STL AAO Other Business 0.9 378 2 2 87.39 0.00 0.00 87.39 300% 262.18 42.26 304.44 609 - - 756 1.8 - -

3 2 8/5/08 AAO STL Other Business 0.9 378 2 2 87.39 0.00 0.00 87.39 300% 262.18 42.26 304.44 609 - - 756 1.8 - -

Flight 4: Mixed Business & Entertainment Flights, Multi-Leg Flights, With Spouses

4 1 9/10/08 STL DTW Mixed 1.2 461 4 2 2 106.58 0.00 0.00 106.58 300% 319.75 42.26 362.01 724 - 922 1,844 2.4 4.8 231 0.60

4 2 9/11/08 DTW HPN Entertainment 1.4 488 4 4 112.83 0.00 0.00 112.83 300% 338.48 42.26 380.74 1,523 - 1,952 1,952 5.6 5.6 488 1.40

4 3a 9/14/08 HPN DTW Entertainment 0.9 434 2 2 100.34 0.00 0.00 100.34 300% 301.02 42.26 343.28 687 - 868 868 1.8 1.8 434 0.90

4 3b 9/14/08 DTW STL Business 1.2 461 2 2 0.00 - - 922 2.4 - -

4 3c 9/14/08 DTW STL Entertainment 2.1 895 2 2 115.60 69.64 0.00 185.24 300% 555.72 42.26 597.98 1,196 - 1,790 1,790 4.2 4.2 895 2.10

Leg 3 Adjustment (895) (665) (1.50)

Flight 5: Mixed Business & Entertainment Flights; With Customers

5 1 10/5/08 STL FTG Business 1.8 761 4 4 0.00 - - 3,044 7.2 - -

5 2 10/8/08 FTG LAS Entertainment 1.4 631 6 6 115.60 23.10 0.00 138.70 300% 416.09 42.26 458.35 2,750 - 3,786 3,786 8.4 8.4 631 1.40

5 3 10/11/08 LAS FTG Entertainment 1.4 631 6 6 115.60 23.10 0.00 138.70 300% 416.09 42.26 458.35 2,750 - 3,786 3,786 8.4 8.4 631 1.40

5 4 10/11/08 FTG STL Business 1.7 761 4 4 0.00 - - 3,044 6.8 - -

Flight 6: Deadhead Leg on Multi-Leg Flight; 50% Seating Capacity Rule

6 1 10/18/08 STL PDK Mixed 1.0 476 8 4 4 3 1 110.05 110.05 31.3% 34.45 42.26 76.71 77 - 1,904 3,808 4.0 8.0 238 0.50

6 2 10/19/08 PDK HPN Deadhead 1.8 763 2 5 2 0.00 - 1,526 1,526 3.6 3.6 763 1.80

6 3 10/20/08 HPN STL Business 2.0 895 5 5 0.00 - - 4,475 10.0 - -

Flight 7: Foreign Travel

7 1 11/15/08 STL MBJ Mixed 3.6 1,585 6 3 3 115.60 176.30 14.41 306.31 300% 918.92 42.26 961.18 2,884 - 4,755 9,510 10.8 21.6 793 1.80

7 Foreign SIFL 1,153

7 2 11/25/08 MBJ STL Mixed 3.6 1,585 6 3 3 115.60 176.30 14.41 306.31 300% 918.92 42.26 961.18 2,884 - 4,755 9,510 10.8 21.6 793 1.80

7 Foreign SIFL 0.00 1,153 - - - - -

Summary: All Other Flights

Business 77.5 39,062 215 215 - 122,762 286.4 - -

110.0 52,000 300 259 4 42 22,306 2,520 33,036 184,143 76.8 429.6 6,979 16.40

86.33% 1.33% 14.00% 17.94% 17.88% 13.42% 14.91%

FLIGHT INFORMATION SIFL CALCULATION COST DISALLOWANCE

50% Seating Capacity Flights Only

Seat Method Flight-By-Flight Method


SIFL Worksheet

31%

0.2312$ 0.1763$ 0.1695$ 300% 42.26$

Flt #


Total Pax

Business Pax

Pers Non-Ent Pax

Entertain Pax


Non-Control Guests

0-500 Miles

501-1500 Miles

1500+ Miles



Reimbursed


1 1 7/1/08 STL MDW Business 0.7 251 6 6 0.00 -

1 2 7/2/08 MDW STL Business 0.7 251 6 6 0.00 -


2 1 7/10/08 STL ORL Entertainment 2.1 874 4 4 1500+ Mile 65.94 0.00 65.94 300% 197.81 42.26 240.07 960 -

2 2 7/20/08 ORL STL Entertainment 2.1 874 4 4 115.60 65.94 0.00 181.54 300% 544.61 42.26 586.87 2,347 2,520


3 1 8/1/08 STL AAO Other Business 0.9 378 2 2 87.39 0.00 0.00 87.39 300% 262.18 42.26 304.44 609 -

3 2 8/5/08 AAO STL Other Business 0.9 378 2 2 87.39 0.00 0.00 87.39 300% 262.18 42.26 304.44 609 -


4 1 9/10/08 STL DTW Mixed 1.2 461 4 2 2 106.58 0.00 0.00 106.58 300% 319.75 42.26 362.01 724 -

4 2 9/11/08 DTW HPN Entertainment 1.4 488 4 4 112.83 0.00 0.00 112.83 300% 338.48 42.26 380.74 1,523 -

4 3a 9/14/08 HPN DTW Entertainment 0.9 434 2 2 100.34 0.00 0.00 100.34 300% 301.02 42.26 343.28 687 -

4 3b 9/14/08 DTW STL Business 1.2 461 2 2 0.00 -

4 3c 9/14/08 DTW STL Entertainment 2.1 895 2 2 115.60 69.64 0.00 185.24 300% 555.72 42.26 597.98 1,196 -

Leg 3 Adjustment (895)


5 1 10/5/08 STL FTG Business 1.8 761 4 4 0.00 -

5 2 10/8/08 FTG LAS Entertainment 1.4 631 6 6 115.60 23.10 0.00 138.70 300% 416.09 42.26 458.35 2,750 -

5 3 10/11/08 LAS FTG Entertainment 1.4 631 6 6 115.60 23.10 0.00 138.70 300% 416.09 42.26 458.35 2,750 -

5 4 10/11/08 FTG STL Business 1.7 761 4 4 0.00 -


6 1 10/18/08 STL PDK Mixed 1.0 476 8 4 4 3 1 110.05 110.05 31.3% 34.45 42.26 76.71 77 -

6 2 10/19/08 PDK HPN Deadhead 1.8 763 2 5 2 0.00 -

6 3 10/20/08 HPN STL Business 2.0 895 5 5 0.00 -


7 1 11/15/08 STL MBJ Mixed 3.6 1,585 6 3 3 115.60 176.30 14.41 306.31 300% 918.92 42.26 961.18 2,884 -


7 2 11/25/08 MBJ STL Mixed 3.6 1,585 6 3 3 115.60 176.30 14.41 306.31 300% 918.92 42.26 961.18 2,884 -

7 Foreign SIFL 0.00 1,153 -


Business 77.5 39,062 215 215

110.0 52,000 300 259 4 42 22,306 2,520

86.33% 1.33% 14.00%

FLIGHT INFORMATION SIFL CALCULATION


SIFL is point‐to‐point

SIFL and Reimbursement


Flight Tax Systems

05/22/14



SIFL Year‐to‐Date Summary

SIFL Report

Footnotes explain SIFL reporting rules


There are Two Sets of IRS Regulations for Non-Business Use of Company Aircraft

Company

SIFL imputed income for employee & guests

Entertainment Flight Cost Disallowance

10400

10290


Entertainment Cost Disallowance Rules

Reporting the Tax Consequences to the Company from Entertainment Flights

05/22/14



Three (3) Categories of Passengers for Entertainment Disallowance Purposes:

No SIFLFully Deductible

Non‐Business Use

Non‐Business /Non‐EntertainmentSIFLFully Deductible

EntertainmentSIFL Not Deductible

Business Use

EmployeeCompany

No SIFLFully Deductible

Business Use

EmployeeCompany

Non‐Business Use

Non‐Business /Non‐EntertainmentSIFLFully Deductible

EntertainmentSIFL Not Deductible


What Is Entertainment?

• “Entertainment” means any activity which is generally considered to constitute entertainment, amusement or recreation: Treas. Reg. 1.274-2(b)(1)

• “Entertainment use is an amusement or recreational activity, such as traveling to a sporting event or a vacation destination” Notice 2005-45

• An activity not “directly related to” or “associated with” the active conduct of a trade or business

10304

10307


So What are Entertainment Flights?

• IRS regulations do not provide guidelines for distinguishing between entertainment and non-entertainment flights

• Final regulations only state that the definition of entertainment is found at Treas. Reg. § 1.274-2(b)(1), offering archaic and unrealistic definitions and examples

• Taxpayers must exercise judgment in determining activities that constitute entertainment and those that do not

• Best “Rule of Thumb” is the attitude of the passenger. If there is an expectation of entertainment when they exit the flight, the flight is likely to be subject to the disallowance

05/22/14



Examples of Entertainment

• IRS states attending nightclubs, cocktail lounges, theatres are examples of entertainment activities

• Country clubs, golf and athletic clubs, sporting events, hunting, fishing, and vacations are all entertainment activities

• Facts and circumstances may determine if an activity is entertainment; attending a theatrical performance would generally be entertainment, unless the taxpayer was a professional theater critic

• Entertainment is often described as a frame of mind…passenger expects enjoyment after flight


Examples Of Non-Entertainment – Routine Personal Activities

• Commuting flights• Flights with investment advisor, attorney, accountant• Flight to take child to boarding school or college• Flights to visit employee’s parents or relatives

- Flight to attend funeral

- Key is lack of entertainment, not “routine” nature of the activity


Examples Of Non-Entertainment:

• Attending to business that is not the business of the company that owns the aircraft

• Attending a meeting of the Board of Directors of an unrelated company

• Charitable flights, such as Angel Flights• Routine personal activities

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Specified Individual

• Final regulations affirm that an entertainment flight requires the presence of a “Specified Individual”

• Specified Individual includes company president, vice president, secretary and treasurer

• Specified Individual definition is slightly different than the definition of “Control Employee” for SIFL regulations, but is essentially the same

• Includes family members even if the employee is not on the plane

• Note that if there is no Specified Individual associated with a flight, there is no entertainment disallowance, even if the passengers engage in entertainment activities


Costs Subject To Disallowance

• Final Entertainment Regs. make clear that all of the costs of the entertainment flights are subject to the disallowance, including- Fixed costs

- Variable costs

- Costs indirectly connected to the flight

- Interest

- Depreciation

• The Final Regs. do not adopt a charter rate alternative to actual costs for calculating the disallowance


Four Calculation Methods of Entertainment Disallowance

• Final regulations affirm the same four methods for allocation of costs associated for entertainment flights - Occupied seat hours - Occupied seat miles- Flight-by-flight hours- Flight-by-flight miles

• Taxpayer is allowed to use the calculation method that results in the lowest tax (i.e., the lowest percentage of disallowance)

• Once the disallowance is calculated, reimbursements are subtracted from that amount

05/22/14



Deadhead Flight Rules

• Deadhead flights are flights with no passengers• Deadhead flights must be treated as passenger flights

for calculating OSH, OSM, or flight-by-flight passengers• “Passengers” are “ghosted” and classified according to

the previous or subsequent passengers for the flights with which they are associated

• If the deadhead is related to one occupied flight, the deadhead passenger count is easy to determine



A

B2 Business Passengers

2 Entertainment Passengers

2 Business Passengers2 Entertainment Passengers

Leg Business Entertainment

Leg 1 ‐ Occupied 2 2

Leg 2 ‐ Deadhead 0 0

TOTAL 2 2

Leg Business Entertainment

Leg 1 ‐ Occupied 2 2

Leg 2 ‐ Deadhead 2 2

TOTAL 4 4

“Ghost”



• When the deadhead flight is related to two or more flights, it may be determined two different ways:

- The weighted average method calculates the passenger by OSM or OSH methods

- Flight-by-flight method uses the percentage of each type of passenger on occupied flights before and after the deadhead

• The IRS gives examples of each method, and neither method accurately calculates the deadhead passengers

• Any realistic approach is probably acceptable providing it is applied in a consistent manner

05/22/14



Deadhead Flights – IRS Example Flight-By-Flight Method

• Three legged flight– Leg 1: 6 hours, A-B, 12 pax, 8 business, 4 entertainment– Leg 2: 4 hours, B-C, deadhead (requires “ghosted” passengers)– Leg 3: 2 hours, C-A, 12 pax, 6 business, 6 entertainment– Total 12 flight hours and 24 pax, 14 business, 10 entertainment

A

C


Deadhead Flights – Flight-by-Flight Method

Leg Total Business Entertainment

1 12 8 4

2 (DH) 0 0 0

3 12 6 6

Totals 36 21 15

100% 58.33% 41.67%


1 12 8 4

2 (DH) 0 0 0

3 12 6 6

Totals 36 21 15

100% 58.33% 41.67%


1 12 8 4

2 (DH) 12 0 0

3 12 6 6

Totals 36 21 15

100% 58.33% 41.67%


1 12 8 4

2 (DH) 12 7 0

3 12 6 6

Totals 36 21 15

100% 58.33% 41.67%


1 12 8 4

2 (DH) 12 7 5

3 12 6 6

Totals 36 21 15

100% 58.33% 41.67%


1 12 8 4

2 (DH) 12 7 5

3 12 6 6

Totals 36 21 15

100% 58.33% 41.67%


Flight Tax Systems

05/22/14



Multi-Leg Mixed Leg Flights (Open-Jaw)

• Flights with a combination of business and entertainment legs plus a return leg

• The return leg may be pro-rated according to the ratio of OSH, OSM, or flight-by-flight passengers on the other legs

• The entertainment cost of a multi-leg trip is the total cost of the flights minus the cost of the flights that would have been taken without the entertainment segment or segments (IRS definition)


Open Jaw Calculation9 Total flight hours

-4 Hours if trip was only business (A-B + B-A)

5 Entertainment hours

Open-Jaw Flight – IRS Example• Three legged flight, one passenger, with both business and

entertainment flight legs - Leg 1: 2 hours business, A-B- Leg 2: 3 hours entertainment B-C- Leg 3: 4 hours return C-A- Total 9 flight hours

Open Jaw Leg: Prorate

Leg-by-Leg Calculation9 Total flight hours

-2 Business hours7 Entertainment hours (B + C)

Open Jaw = 22% Cost Disallowance Savings


Deduction Limitation for Non-Specified Individuals Requires Withholding by Employer and

Reporting by Employee

• There is no entertainment cost disallowance for non-specified individuals, such as employees or third-party service providers, providing:

• The company reports the flights as compensation (i.e., SIFL) to the passenger – Report the value of the flight on a W-2 for the employee– Report the value of the flight on a 1099 for a non-employee– Compensation is subject to withholding

05/22/14



Interest “Allocated to” the Airplane

• Example: $10 million aircraft financed from $100 million company line of credit – The loan and the collateral are not as easily identified,

especially if the cash is run through the company bank account– New rules state that interest allocated to an aircraft is also

subject to the disallowance (IRS interest-tracing rules §1.163-8T)

– This rule could inadvertently extend the disallowance percentage to another asset or a much larger debt account

– Interest tracing rules are complex; buyers should obtain guidance if purchasing an aircraft with a LOC


Cost Disallowance vs. Reimbursement

• Entertainment imputed income (SIFL) or reimbursement reduces the entertainment cost disallowance

• If entertainment imputed income (SIFL), or reimbursement equals the total cost of the flight, no disallowance

• If entertainment imputed income (SIFL), or reimbursement is less than the cost of the flight, disallow the difference

• Note: Reimbursement is subject to FET

(“Costs” includes operating costs, ownership costs, interest and depreciation)


Disallowance vs. Reimbursement (cont.)

Calculated company entertainment disallowance: $100,000

Entertainment SIFL/Flight reimbursementFrom employee/passenger (whichever is greater): (25,000)

Net company disallowance: $75,000

05/22/14



Calculating The Disallowance

• Step 1: Analyze flights for entertainment passengers• Step 2: Calculate entertainment cost limitation percentage

for the year• Step 3: Calculate straight-line depreciation adjustment• Step 4: Add direct operating costs and ownership costs

and apply the disallowance percentage, add back the depreciation adjustment and the SIFL imputed income


Cost Disallowance Worksheet

31%

0.2312$ 0.1763$ 0.1695$ 300% 42.26$

Flt #


Total Pax

Business Pax

Pers Non-Ent Pax

Entertain Pax


Non-Control Guests

0-500 Miles

501-1500 Miles

1500+ Miles



Reimbursed

Entertain Seat Miles

Total Seat Miles

Entertain Seat Hours

Total Seat Hours

Entertain Miles

Entertain Hours


1 1 7/1/08 STL MDW Business 0.7 251 6 6 0.00 - - 1,506 4.2 - -

1 2 7/2/08 MDW STL Business 0.7 251 6 6 0.00 - - 1,506 4.2 - -


2 1 7/10/08 STL ORL Entertainment 2.1 874 4 4 1500+ Mile 65.94 0.00 65.94 300% 197.81 42.26 240.07 960 - 3,496 3,496 8.4 8.4 874 2.10

2 2 7/20/08 ORL STL Entertainment 2.1 874 4 4 115.60 65.94 0.00 181.54 300% 544.61 42.26 586.87 2,347 2,520 3,496 3,496 8.4 8.4 874 2.10


3 1 8/1/08 STL AAO Other Business 0.9 378 2 2 87.39 0.00 0.00 87.39 300% 262.18 42.26 304.44 609 - - 756 1.8 - -

3 2 8/5/08 AAO STL Other Business 0.9 378 2 2 87.39 0.00 0.00 87.39 300% 262.18 42.26 304.44 609 - - 756 1.8 - -


4 1 9/10/08 STL DTW Mixed 1.2 461 4 2 2 106.58 0.00 0.00 106.58 300% 319.75 42.26 362.01 724 - 922 1,844 2.4 4.8 231 0.60

4 2 9/11/08 DTW HPN Entertainment 1.4 488 4 4 112.83 0.00 0.00 112.83 300% 338.48 42.26 380.74 1,523 - 1,952 1,952 5.6 5.6 488 1.40

4 3a 9/14/08 HPN DTW Entertainment 0.9 434 2 2 100.34 0.00 0.00 100.34 300% 301.02 42.26 343.28 687 - 868 868 1.8 1.8 434 0.90

4 3b 9/14/08 DTW STL Business 1.2 461 2 2 0.00 - - 922 2.4 - -

4 3c 9/14/08 DTW STL Entertainment 2.1 895 2 2 115.60 69.64 0.00 185.24 300% 555.72 42.26 597.98 1,196 - 1,790 1,790 4.2 4.2 895 2.10

Leg 3 Adjustment (895) (665) (1.50)


5 1 10/5/08 STL FTG Business 1.8 761 4 4 0.00 - - 3,044 7.2 - -

5 2 10/8/08 FTG LAS Entertainment 1.4 631 6 6 115.60 23.10 0.00 138.70 300% 416.09 42.26 458.35 2,750 - 3,786 3,786 8.4 8.4 631 1.40

5 3 10/11/08 LAS FTG Entertainment 1.4 631 6 6 115.60 23.10 0.00 138.70 300% 416.09 42.26 458.35 2,750 - 3,786 3,786 8.4 8.4 631 1.40

5 4 10/11/08 FTG STL Business 1.7 761 4 4 0.00 - - 3,044 6.8 - -


6 1 10/18/08 STL PDK Mixed 1.0 476 8 4 4 3 1 110.05 110.05 31.3% 34.45 42.26 76.71 77 - 1,904 3,808 4.0 8.0 238 0.50

6 2 10/19/08 PDK HPN Deadhead 1.8 763 2 5 2 0.00 - 1,526 1,526 3.6 3.6 763 1.80

6 3 10/20/08 HPN STL Business 2.0 895 5 5 0.00 - - 4,475 10.0 - -


7 1 11/15/08 STL MBJ Mixed 3.6 1,585 6 3 3 115.60 176.30 14.41 306.31 300% 918.92 42.26 961.18 2,884 - 4,755 9,510 10.8 21.6 793 1.80


7 2 11/25/08 MBJ STL Mixed 3.6 1,585 6 3 3 115.60 176.30 14.41 306.31 300% 918.92 42.26 961.18 2,884 - 4,755 9,510 10.8 21.6 793 1.80

7 Foreign SIFL 0.00 1,153 - - - - -


Business 77.5 39,062 215 215 - 122,762 286.4 - -

110.0 52,000 300 259 4 42 22,306 2,520 33,036 184,143 76.8 429.6 6,979 16.40

86.33% 1.33% 14.00% 17.94% 17.88% 13.42% 14.91%

FLIGHT INFORMATION SIFL CALCULATION COST DISALLOWANCE


Seat Method Flight-By-Flight Method

Cost Disallowance is

leg‐by‐leg

Calculate Cost Disallowance by all

4 methods


Flight Tax Systems

05/22/14



Flight Tax Systems


Calculates entertainment cost disallowance under all four methods. Permits taxpayer to select the method that has the best results.

Entertainment Cost Disallowance Report


Software for Calculating SIFL and Cost Disallowance

• Software products are becoming commonplace for calculating SIFL and cost disallowance adjustments

• Software is more adapted to providing “real time” running totals to alert management to make adjustments in the use of the aircraft to avoid unanticipated tax consequences

• Software does not eliminate the need to understand the rules (but it can help)

05/22/14



Flight Tax Systems – Tax Software for Aircraft Owners

• Three versions: Standard, Fractional, and Enterprise • Automates all of the calculations seen today• Excel and electronic data import• We provide complete training and support• SIFL, cost disallowance, SEC, cost center, state tax modules• For more info and to order: www.flighttaxsystems.com• Call 954-763-9363 for a no-obligation free trial


Final Thoughts:

• The IRS does seem to concentrate on aircraft during audits• The key to sustaining aircraft deductions is in having

“contemporaneous” and “accurate” documentation• SIFL is a required “nuisance.” Cost disallowance has far

more tax consequences• Gray areas abound; set company policies and be consistent• It is important to make accurate SIFL and cost disallowance

calculations, but concentrate on documenting the business flights. THE BUSINESS FLIGHTS ARE THE ONES YOU WANT TO KEEP!


Thank You Very Much!

Jed R. Wolcott, MBA Sue Folkringa, MBACertified Public Accountant Certified Public Accountant

[email protected] [email protected]

Wolcott & Associates, P.A.Flight Tax Systems, LLC

5525 NW 15th Avenue, Suite 203Fort Lauderdale, Florida 33309

866-791-6092www.aviation‐cpa.com

Documents

Best Practices for Managing Non-Business Use of Aircraft · 05/22/14 Copyright © 2014 Wolcott Aviation Seminars, LLC 13 © 2014 Wolcott Aviation Seminars, LLC 37 SIFL & Cost Disallowance