Treasury and IRS Issue Guidance on Personal Use of Corporate Aircraft

Treasury and IRS Issue Guidance on Personal Use of Corporate Aircraft

WASHINGTON, DC -- Today the Treasury Department and the IRS issued guidance on the tax treatment of the personal use of corporate aircraft for entertainment travel. The Notice issued today explains how to apply the American Jobs Creation Act of 2004 (AJCA) limitation on the costs that a business may deduct when an executive uses the company's aircraft for entertainment travel. This Notice provides interim guidance until regulations are promulgated.

Under prior law, if an employee used a business aircraft for entertainment travel, the employer could deduct the cost of providing the flight. As is commonly the case with fringe benefits, the employee is then required to report the value of the flight as additional income for tax purposes. Previously, while the employer generally would deduct the total cost of providing the flight, often many thousands of dollars, the employee would add only a relatively small amount, calculated under the Department of Transportation's Standard Industry Fare Levels (SIFL) formula, to income. For flights by executives, this asymmetry between the large amount the company deducted and the small amount the executive included as taxable income was addressed by the AJCA.

Under the AJCA, the business' deduction may no longer exceed the amount that the executive takes into income for the entertainment use of the aircraft. The definition of "entertainment use" in the guidance is taken from the existing statute. Generally, "entertainment use" is considered an amusement or recreational activity, such as traveling to a sporting event or to a vacation destination. If the purpose of the trip is business related entertainment, the limitation enacted by the AJCA applies to the executive as well.

Today's Notice clarifies who is covered by the limitation, describes the relevant costs, and illustrates the allocation of the costs for an entertainment flight. Although the Notice focuses on aircraft, the principles of the Notice may apply to other entertainment as well.

May 27, 2005 JS-2476 REPORTS: A copy of the Notice