On February 21, 2024, the Internal Revenue Service (IRS) announced a new initiative to audit the use of airplanes by corporations, large partnerships and high-net-worth individuals. While the IRS has always examined plane usage, this new focus aligns with recent IRS messaging that corporations and high-income taxpayers are not paying their “fair share” of tax and have been subject to “historically low audit rates.” The IRS will use some of its Inflation Reduction Act of 2022 funding to step up its enforcement efforts in this area.
Indeed, the IRS has been keeping score and publicly sharing their successes in collecting tax from millionaire taxpayers. We have also previously reported on the IRS’s strengthened enforcement plans thanks to its newfound funding.
The IRS’s airplane usage audit initiative will focus on allocations between business and personal use, which highlights several potential tax issues, including:
- Limitations on deductions per Internal Revenue Code Section 274
- Limitations on deprecation and recapture under Internal Revenue Code Section 280F
- Whether the value of a flight is income to the passenger and/or guests (See Reg. §1.61-21).
Practice Point: If you have an airplane and claimed tax deductions for its use and ownership, you should prepare for an IRS examination. What can you do now? First and foremost, you should maintain meticulous records that fully substantiate the business use of the plane. For example, adding more detail about what the plane was used for, how it was used, and tying its use to a business purpose will be key to winning over an IRS auditor. Second, make sure the maintenance and flight log records are up to date and correct. Also, although not directly related to the recently announced IRS’s audit initiative, do not forget to ensure compliance with Federal Aviation Administration regulations and sales tax, use tax, and federal excise tax considerations, particularly if you decide to reorganize the ownership or organizational structure of an entity that owns an aircraft.