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58 • TWIN & '" 'I'U l'B INE

Business

TAX TIPS

by Phil Crowther

In some cases, an aircraft owner will prefer to use his own aircraft on company business rather than

using a company aircraft - if the com-pany happens to own or operate one . The tax consequences of such use can vary widely depending on whether the aircraft owner is a sole proprietor, part-ner, shareholder or employee .

Sole Proprietor Deductions

The sole proprietor of an unincorpo-rated business can deduct the cost of using his aircraft on company business as a trade or business expense. The same is true where the owner of a sin-gle-member LLC uses his own aircraft on LLC business.

Similarly, an investor can deduct the cost of using his aircraft from gross income if the cost is properly charge-able to an investment generating rent and royalty income. Otherwise, the cost is deductible only as a miscella-neous itemized deduction.

These deductions are subject to var-ious limitations. Miscellaneous item-ized deductions are deductible only to the extent that they exceed 2 percent of adjusted gross income. In addition , a taxpayer with adjusted gross income in excess of $150,500 may also have to reduce total itemized deductions by the lesser of 3 percent of adjusted gross income or 80 percent of the itemized deductions (the "3 percent/80 percent" rule). Miscellaneous itemized deduc-tions are not deductible for alternative minimum tax purposes.

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Partner Deductions

A partner (including the member of a limited liability company) can deduct the cos t of using his aircraft as a trade or business expense. The courts have long h eld that a part-ner is engaged in the separate "trade or business of being a part-ner. " The IRS has ruled that if under the partnership agreement or practice the partner is required to pay certain partnership expens-es out of his own funds , then the partner can claim a trade or busi-ness deduction for those expenses. In order to claim a deduction , the partner must be sure to request reimbursement of any reimbursable expenses.

Shareholder and Director Deductions

For most purposes, a corporate shareholder is a mere investor and can deduct the cost of using his own aircraft only as a miscellaneous

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itemized deduction. However, a shareholder 'vvho is also a director may be able to treat some portion of the aircraft costs as business costs since, for tax purposes, a director is engaged in a trade or business.

Employee Deductions

In the "good old days," an employee could deduct the cost of using his own aircraft on company business as a trade or business expense. Perhaps the most inter-esting example was the Robert Noyce case.

The taxpayer in this case was vice-chairman and one of the founders of Intel. At the time (1983), Intel corporate policy was to treat all employees alike -except with regard to salary. Intel did not own a company jet and expected corporate officers to incur unreimbursed expenses as

part of their jobs. The Intel travel reimbursement policy provided for reimbursement for air travel at commercial airline rates, regard-less of whether the employee elected to t1y first class or by pri-vate airplane.

As vice chairman, Noyce was the governmental affairs liaison and responsible for Intel's public rela-tions. His duties included accept-ing speaking engagements throughout the United States, per-forming various governmental and public service duties, serving as chairman of the Semiconductor Industry Association, serving as a member of various trade associa-tions of the semiconductor indus-try and a Presidential Commission on Industrial Competitiveness. Noyce also had to attend numer-ous onsite meetings at Intel. Some of these trips were not regularly and easily scheduled.

JANUARY 2007

Because of the changing sched-ules of the people with whom he met, he had to keep a flexible travel schedule. In order to fulfill these responsibilities , Noyce purchased a jet. He deducted the unreim-bursed costs of using this aircraft on company business. The IRS argued that Noyce could not deduct the costs of using his own jet because the decision to use the jet was voluntary. The Tax Court disagreed, concluding that Intel expected Noyce to attend these meetings as part of his job and not-ing that written corporate policies required officers to pay for the additional travel costs as part of their job.

Even before Noyce was decided, Congress had amended the law to prevent employees from deducting the cost of using his own automo-bile or aircraft on company busi-ness. In 1984, Congress enacted the listed property rules that pre-vent an employee from claiming any depreciation or rental deduc-tion on "listed property" (includ-ing an automobile or aircraft) "unless such use is for the conven-ience of the employer and required as a condition of employment."

In 1986, Congress eliminated the rule allowing employees to claim a business deduction for travel costs. Instead, an employee can now deduct these travel costs only as a miscellaneous itemized deduction . The net effect of these changes is that most employees are unable to deduct unreimbursed expenses allocable to employee business use of personal aircraft.

Avoiding Employee Limitations

The employee limitations apply only to a taxpayer generally defined as an employee. The limitations do not apply to a "s tatutory employ-ee" - an independent contractor such as an insurance salesperson who is an employee solely for pay-roll tax purposes.

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The status of an S corporation owner-employee is not entirely clear. However, this kind of aircraft owner may be able to avoid the employee limitations by convert-ing the S-corporation to an LLC.

The most obvious way to avoid the limitations on employee deductions is to have the employer

buy or lease the aircraft from a third party. However, many employers have good reasons for not wanting to buy or lease an air-craft, including the desire to avoid unwanted publicity.

If the employer does not want to buy or lease the aircraft , the second-best alternative is for the

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employer to reimburse the employ-ee for actual aircraft costs. The tax rules allow an employee to exclude amounts received from the employer under a "reimbursement or other expense a llowance arrangement." From the perspec-tive of the employee, this is essen-tially the same as obtaining a deduction. In order to qualify, the arrangement must be an "account-able plan" that reimburses only

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expenses with a business connec-tion, requires the employee to sub-stan ti a te the expenses and return any excess reimbursement. In the case of "listed property", such as a n automobile or aircraft , the employee must docum ent all of the elements of the ex pense, including the date, amount and business purpose.

Instead of reimbursing the

employee for actual payments, the tax rules allow an employer to pay an allowance, such as a mileage, hourly or daily allowance. In this case, the employee meets the sub-stantiation requirement by docu-menting the unit of measure, such as the miles, hours or days. An e mployer can c reate an allowance based on reasonable es timates of actual costs. Although the employee cannot obtain a reimbursement of the tax deprecia tion amount, the employee might be able to obtain a reimbursement of the rental value of the aircraft, especially if the employee has put the aircraft in a separate leas ing company for sales tax purposes.

As an alternative to reimburse-ment, the employee can rent the aircraft to the company. Under the best of circumstances, the employ-ee will be able to deduct all of the expenses of renting the aircraft to the company, including deprecia-tion. However, in order to do so, the employee must be able to avoid the hobby loss limitations and the passive activity loss limita-tions. That is a challenge that would require an entire article to explain . And you should not be surprised to hear that, here, too , the rules are stacked against an employee.

An aircraft owner may or may not be able to deduct the costs of using his airc raft on company business. This sta tus of the owner is of critical importance. If the owner is an employee, the owner may have a hard time deducting any expenses. ~

.JA.1'1UARY 2007