If your company's jet is occasionally used for pleasure as well as business — such as flying an employee to a vacation destination — you could jeopardize your tax deduction, increasing the cost of owning and operating the aircraft for your business.
The Internal Revenue Service (IRS) will disallow any deductions for expenses of a business aircraft when it is used for entertainment purposes. In a nutshell, if the jet was flown for 100 hours and 30 hours was for entertainment purposes, the IRS would force the company to disallow 30 percent of its deductions, including — and most significantly — depreciation deductions. For a company with a high-tax-basis aircraft, the loss of depreciation entitlements can push the lost tax deduction to more than $20,000 or $30,000 per flight hour (or more in the case of bonus depreciation eligible aircraft or aircraft purchased late in the tax year).
The disallowance even extends to “deadhead” flights, when the aircraft is needed for business use while an employee is using it for a vacation and the jet is brought home after dropping off the employee. The new rules provide that the company factor in the deadhead flight into the calculation of the disallowance and, even though no passengers are on board, the company will experience further loss of deductions.
The best antidote to this problem is to sell jet membership or block-time cards — licensed resellers of unused fractional shares — for entertainment flights. With these programs, you don't own the aircraft but, instead, charter it from the card provider, purchasing a block of hours such as 25 or 50 on the card. The benefit of block-time cards is that usually, the card provider has a fleet of aircraft they manage and are also able to draw from a wide array of charter operators, which means flight availability is often guaranteed with minimal notice. Other benefits:
Your account is deducted only for occupied flight hours.
Deadhead flights don't usually count toward your flight time.
It may be possible to obtain a discounted rate or elongated time frame on which to use your card hours.
You can choose the best possible aircraft solution based on the purpose of your trip — either light-, mid-, large-cabin or extended-range aircraft (as opposed to the one-size-cabin option with your company aircraft).
The biggest and most-important benefit to using a flight card: The disallowance rules relate only to the amount paid for the card, and tax depreciation is not a cost factored into the card. As a result, the after-tax cost of using a card is likely lower than use of a company aircraft with a high-tax basis. For more information about maximizing your investment in your company jet, contact us.