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Deduction Limitations for Personal Entertainment Flights
(American Jobs Creation Act of 2004)
A provision contained in the American Jobs Creation Act of 2004 (H.R. 4520) 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. Prior to this Act, companies that used aircraft for at least 50% business use could generally deduct the full cost of the aircraft and operations as a business expense (provided non-business flights were appropriately categorized and the employee was properly taxed on the value of non-business flights). In May 2005, IRS issued Notice 2005-45 providing instructions to taxpayers on this change. The Notice mandates the use of an “occupied seat hours” or “occupied seat miles” methodology to allocate aircraft usage and deduction limitations.
On Friday, June 15, 2007, the long-awaited regulations on entertainment use of business aircraft were published by the IRS. These regulations are proposed and open for comment through September 13, 2007. An early review shows improvements over previous guidance issued by IRS in Notice 2005-45. NBAA had met with IRS and Treasury Department on numerous occasions to express the industry's concerns with the approach IRS took in the Notice, as it skewed results, was administratively burdensome and was punitive. NBAA and its Tax Committee conducted a thorough review of the proposed regulations and submitted comments to the IRS.
On August 1, 2012, the IRS published final regulations (240 KB, PDF) that formally put into place much of what the Service proposed in 2007. Despite NBAA’s efforts to meet with the IRS and offer substantive comments to improve the proposed regulations, the final regulations continue to be administratively burdensome and produce unfairly skewed disallowances for many taxpayers. In the final regulations, the IRS did make changes dealing with the treatment of depreciation and interest expenses. Learn more about the final regulations.
- IRS Issues Proposed Regulations on Entertainment Use of Business Aircraft, By Keith G. Swirsky
- Comparison of Notice 2005-45 and Proposed IRS Regulations (44 KB, PDF)
- Calculating Entertainment Use Deduction Limitations, By George P. Rice, CPA
- Strategies to Deal with 2004 Amendments to Entertainment Facility Expense Disallowance Applicable to Aircraft - after Notice 2005-45, By John B. Hoover, Esq. (187 KB, PDF)
- IRS Publishes Guidance for Calculating Disallowance of Expense Deductions for Recreational Use of Corporate Aircraft, By Keith G. Swirsky, Esq., and Troy A. Rolf, Esq.
Regulatory and Legislative Information
- Final Regulations on Deductions for Entertainment Use (PDF, 240 KB)
- IRS Notice of Proposed Rulemaking for Certain Non-Business Use of Aircraft (81 KB, PDF)
- IRS Notice 2005-45 (35 KB, PDF)
- American Jobs Creation Act of 2004
NBAA Public Comments
- NBAA President and CEO Ed Bolen's Testimony on IRS Proposed Rulemaking for Certain Non-Business Use of Aircraft (27 KB, PDF)
- NBAA Comments on IRS Proposed Rulemaking for Certain Non-Business Use of Aircraft (154 KB, PDF)
- NBAA Comments on IRS Deduction Limitations Notice
- NBAA Letter Requesting Guidance on American Jobs Creation Act of 2004