Tracey Cheek posted an articleTaxing Relationships - The New Tax Traffic Controller for Partnership/LLC Aircraft Owners see more
NAFA member David N. Corkern, J.D., LL.M., aviation attorney with Shackelford, Bowen, McKinley & Norton, LLP, shares information about the recent IRS changes made regarding partnerships and LLCs for aircraft owners.
Do you own an airplane through a limited liability company that is treated as a partnership to preserve privacy, or to minimize tax or other liability exposure? Or in which the airplane is held in a partnership of all “natural persons” (i.e. human beings)? Regardless of the reason, you’ll want to be aware of the recent changes made to the way those partnerships/limited liability companies (LLCs) are treated by the IRS during an audit.
In 2015, with the passage of the Bipartisan Budget Act, the U.S. Congress significantly revised the manner in which partnerships/LLCs are audited. (While LLCs differ from partnerships under state law, they are treated and taxed as partnerships by the IRS, unless they have elected to be taxed as corporations. All references to “partnerships” in this article refer to such LLCs as well.)
The IRS has issued regulations known as the Centralized Partnership Audit Regime (“CPAR”), effective for audits of partnership tax years beginning on or after January 1, 2018. The CPAR requires that all partnerships designate a “partnership representative.”
This designation must be made for each tax year of the partnership and replaces the “tax matters partner” under the old rules. Unlike the tax matters partner, the partnership representative may be someone other than a partner. Do exercise caution when choosing your new partnership representative, since the IRS will not deal with any other person or entity in case of a tax audit. In addition, the CPAR gives the partnership representative greater powers than the former tax matters partner – to bind the partnership and all of its partners in negotiations with the IRS, notwithstanding any contrary provision in the partnership agreement.
CPAR also changes the way in which tax adjustments are made. Prior to CPAR, if an audit resulted in additional taxes, penalties, and interest due for the audited tax year, those adjustments would have been made at the partnership level and each partner’s return also was adjusted. The net result of the pre-CPAR audit was that taxes, penalties, and interest were collected from those who were partners in the audited tax years.
Now under CPAR, the IRS will assess all taxes, penalties, and interest against the partnership, which shifts the burden to current partners, and not to those who were partners for the years under review.
For example, assume that “High-Flying, LLC” owns an aircraft. From 2012 through 2016, individuals A, B, and C were equal partners in High-Flying, LLC. When C sold his interest to D in January, 2017, D became an equal partner with A and B in High-Flying, LLC. If, after audit, the IRS determines that additional taxes are owed by High-Flying, LLC for tax year 2016, High-Flying, LLC will bear that cost, and D must pick up the tax tab for the former partner, C, absent an “opt-out” or “push-out election” discussed below.
How can a new partner be protected from bearing someone else’s tax liability under CPAR? There are two ways to do so:
First, a partnership with fewer than 100 partners and no ineligible partners (e.g., partnerships, trusts, and LLCs taxed as partnerships) may elect out of CPAR. This “opt-out” election is made yearly on the partnership’s tax return.
Second, a partnership may use a “push-out” election to shift the tax audit adjustments to former partners. The “push-out” election also must be made yearly on the partnership’s tax return.
If you are thinking of buying or selling an interest in a partnership or limited liability company that owns an aircraft, pay close attention to the shifting tax liability created by CPAR. These rules are somewhat complicated and it’s always a good idea to consult an expert before amending any partnership agreement to comply with CPAR.
This article was originally published in Business Aviation Advisor on July 1, 2019.
Tracey Cheek posted an articleKey Factors for Classifying Aircraft Travel for Federal Income Tax Purposes see more
NAFA member, Ryan Swirsky, Associate with GKG Law, discusses factors for classifying aircraft travel for tax deductions.
Many aircraft owners use their aircraft for both business and non-business purposes during the same trip. This practice can often make categorization of a particular trip more difficult, as the “primary purpose” of the trip must be for business in order to be tax deductible. Further, this categorization must be made for each passenger for each leg of a trip. GKG Law would like to remind aircraft owners of the “substantiation requirement” for taxpayers and discuss factors that will cause the Internal Revenue Service (“IRS”) to more heavily scrutinize the classification of a particular trip. One of these factors happens to be travel around holidays, such as the Fourth of July.
An aircraft owner is required to make the initial determination of how to categorize its aircraft-related travel for purposes of tax deductibility (e.g., business, entertainment, personal non-entertainment, commuting). However, the aircraft owner must also be able to adequately substantiate with detailed records its classification of the primary purpose of a particular flight in order to support its deductions for the business use of its aircraft. If this requirement is not met, the IRS is able to reclassify the aircraft owner’s initial categorization, thereby potentially disallowing the aircraft owner’s deduction of expenses relating to the flight.
Certain factors that make a particular trip look more like it was undertaken in connection with entertainment, which would make those expenses non-deductible, can raise “red flags” for an IRS auditor and cause the auditor to scrutinize the trip more closely. As previously mentioned, one such factor is travel around holidays. Other factors include:
- Travel itineraries that include a weekend (e.g., flying to the destination on a Friday and leaving on a Monday);
- A longer period of time spent at the destination than is necessary for the business purpose;
- Travel with multiple passengers of the same last name aboard the flight (e.g., husband/wife, family members);
- Travel to a “resort type” destination (e.g. – a location known for skiing, golf, or the beach);
- Travel with many passengers on board a particular flight when it is not clear that all of the passengers are traveling for the business purpose; and
- Travel where fewer passengers are on the return leg of a round trip, or on later legs of a multi-leg flight.
Take the recent Fourth of July holiday, for example, where an aircraft owner has a business meeting in Miami, Florida on Friday, July 5th. The aircraft owner flies to Miami on Thursday, July 4th and returns home on Monday, July 8th. In an income tax audit, it is likely that the IRS would scrutinize the business classification of such a flight. The IRS may recategorize it as a personal entertainment flight unless the aircraft owner can produce adequate documentation to prove otherwise. The aircraft owner will need to produce sufficient documentation, created contemporaneously with the travel (as records created after a tax audit is initiated are usually deemed to be less credible), proving that the primary purpose of the travel was for business. For example, records or correspondences showing that the business meeting was planned before any subsequent entertainment activities were planned would be helpful to show the primary purpose of the trip was business related.
Categorization of the reason for travel on board a company aircraft is decided on a case-by-case basis using a facts and circumstances analysis. Certain trips can be more difficult to categorize than others or contain taxpayer adverse facts that accompany legitimate business travel. The business aviation tax attorneys at GKG Law regularly advise clients regarding these issues and the types of records that an aircraft owner should keep to maximize the taxpayer’s ability to deduct legitimate aircraft-related business travel expenses. GKG Law also regularly represents aircraft owners in IRS income tax audits involving these issues. For more information, please contact Ryan Swirsky (firstname.lastname@example.org or 202.342.5282).
This article was originally published by GKG Law on July 9, 2019.