Non-Business Use of Employer-Provided Aircraft

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NBAA Welcomes FAA Proposed Legal Interpretation
July 12, 2010
FAA has long held the position that personal flights were not within the scope of the business of the company; therefore, such flights could not be reimbursed under 14 CFR 91.501(b)(5). In response to Member input on this issue, NBAA had asked the FAA to reconsider their long-standing blanket prohibition on reimbursement for such flights and argued that for certain executives this is within the scope of the business of the company. While taking measures to safeguard the spirit of the regulation, last week the FAA published a proposed interpretation in the Federal Register that would permit reimbursement for personal flights under specific circumstances. NBAA welcomes this proposed interpretation and will file a supporting statement during the 30 day comment period.

Occasionally a company airplane might be made available to employees for reasons not directly related to the business of the company. Businesses must be familiar with applicable rules, such as FAA, IRS and SEC regulations when conducting these flights.

FAA

The FAA has a general prohibition on employees reimbursing companies for personal flights when the aircraft is operated under Part 91 of the Federal Aviation Regulations. In fact, FAA’s Chief Counsel issued a Federal Aviation Decision regarding this issue in 1993. This is often frustrating as many employees desire to reimburse the company directly for non-business use of the aircraft thus avoiding additional taxable income (see IRS section below) and potential disclosure to shareholders (see SEC section below).

Some exceptions to the general prohibition on reimbursement may be possible, such as a timeshare agreement between the company and the employee, or payment to the charter operator if the aircraft is on a Part 135 charter certificate.

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IRS

Since in most cases the employee cannot pay the company non-business use by an employee is generally considered a taxable fringe benefit. The value of the flight, or a portion thereof, must be included in the employee’s income. In basic terms, whenever an employee or guest (including family members of the employee) uses a company airplane for non-business/personal use, the flight is taxable to the employee.

Valuing Non-Business Flights

The IRS prescribes in its regulations how this personal transportation should be valued by the employer.

When calculating the value of a flight deemed to be taxable, the IRS allows operators to choose between two different methods. The first method uses the fair market value or charter value of the flight. This method looks at the cost of chartering the same or comparable aircraft for the same or comparable flight. Of the two methods, the fair market value often produces a higher value for the flight. The second and more common method determines the value of the flight using a formula that the IRS calls the Standard Industry Fare Level (SIFL). The SIFL method is based on the distance traveled, size of the aircraft, the number of people accompanying the employee, and a multiple that is higher or lower depending on whether the employee is classified as “control” or “non-control.” There are numerous other considerations, which are addressed in NBAA’s Personal Use of Employer-Provided Aircraft Handbook.

Deduction Limitations for Personal Entertainment Flights

A provision contained in the American Jobs Creation Act of 2004 limits the ability of a company to deduct the aircraft expenses for certain non-business flights for specified individuals. Under the Act, the difference between the actual cost of personal entertainment flights taken by “specified individuals” and the amount included in income by these employees (based on SIFL or Fair Market Valuation), is disallowed as a deduction to the corporation.

SEC

Providing a company aircraft to an executive officer or director for his or her personal use generally requires disclosure in Securities and Exchange Commission (SEC) reports under federal securities law for publicly held companies. Public companies must report the Aggregate Incremental Cost (AIC) associated with personal flights, which means the cost to the company of the personal flights, not the tax value of the benefit (i.e., the SIFL rate). While the SEC has not specifically defined AIC in the context of business aircraft, it is widely interpreted within the business aviation community to equate to the direct operating costs related to a personal flight, and may include costs associated with deadhead repositioning flights.

Additional Resources