American Jobs Creation Act of 2004

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IRS Final Regulations on Deduction Limitations for Personal Entertainment Flights

March 11, 2013

Background on Final Entertainment Use Regulations

The IRS released final regulations (240 KB, PDF) on August 1 that implement provisions contained in the American Jobs Creation Act of 2004 to disallow certain deductions for the entertainment use of business aircraft. Under the Act, the difference between the actual cost of personal entertainment flights provided for “specified individuals” and the amount included as income for the individual (based on SIFL or Fair Market Valuation), is disallowed as a deduction to the corporation.

Since the passage of this Act, NBAA met with IRS officials on numerous occasions to encourage the Service to develop regulations that maintained Congressional intent while not being unfair or administratively burdensome. In May 2005, the IRS issued Notice 2005-45 that provided taxpayers with instructions on the new rules. This Notice produced the “occupied seat hours” or “occupied seat miles” methodology to track aircraft use and calculate deduction limitations.

In June 2007, the IRS published proposed regulations on entertainment use of business aircraft. While the regulations provided some improvements over Notice 2005-45, they were still administratively burdensome and produced unfairly skewed disallowances for many taxpayers. NBAA submitted extensive comments with specific suggestions for improving the proposal, such as using a primary purpose test to determine the entertainment or non-entertainment classification for a flight.

Unfortunately, the final regulations released by IRS do not differ substantially from the proposed rules. While there are no significant changes, the final rules represent the formal position of the IRS and must be followed. Operators should review the rules carefully with their tax advisors to ensure that they have a strategy for compliance.

In the final regulations, IRS did make changes dealing with the treatment of depreciation and interest expenses. The final rules provide that, in the case of a taxpayer making the election to use the straight line depreciation method for purposes of the disallowance calculation,  the disallowed depreciation in any year will not exceed the allowable depreciation for such year. Also, interest is now included in the costs subject to disallowance if the underlying debt is secured by or allocable to an aircraft used to provide entertainment flights.

Review NBAA Article Detailing Changes in Final Regulations (PDF, 135 KB)