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 (email@example.com or 202.342.5282).
This article was originally published by GKG Law on July 9, 2019.
Tracey Cheek posted an articleNavigating Multi-State Aircraft Use Tax Complexities see more
NAFA members Keith Swirsky and Ryan Swirsky with GKG Law discuss navigating multi-state aircraft use tax complexities.
Given the large amount of money involved with the purchase of corporate aircraft, many aircraft owners are rightfully concerned with sales tax and the complementary use tax. These concerns often prompt owners to take into consideration ways to minimize or eliminate their tax liability on the purchase.
Most purchasers are aware that sales tax liability can be incurred based on the location of closing and will plan accordingly. Approaches include to close in a state with no sales tax, in a state with an applicable exemption from sales tax for their aircraft, in a low sales tax state such as the Carolinas, in a state with a fly-away exemption, or in a state where they have determined they would owe the complementary use tax if sales tax was avoided.
With respect to the latter point, most purchasers are aware that the state where they hanger their aircraft, if different from the state where closing occurred, will be owed use tax on the transaction, and engage aviation tax counsel to implement strategies to minimize or eliminate use tax liability. These strategies vary state by state, including the mechanics and requirements of seemingly similar structures. Common tax planning tactics include sales for resale, interstate commerce exemptions, casual or isolated sale exemptions, and common carrier exemptions.
Having planned for sales and use tax based on where the closing for the aircraft occurred and where the aircraft will be based, many aircraft owners believe that their sales and use tax concerns have ended. However, this is not the case. Multiple states can assert the complementary use tax is owed, even when such use tax is already being paid to another state! Such a situation occurs when another state asserts that it has “nexus” with the aircraft. Many complex issues, often with taxpayer-adverse consequences, can result in such a situation.
The concept of nexus relates to the level of connection and presence between the taxpayer and the taxing jurisdiction. In order for a state to impose its sales or use tax, the taxpayer must have sufficient nexus with that state. The level of connection and presence required to establish nexus to assert use tax on an aircraft varies state by state and, unfortunately for the taxpayer, there is often a lack of clear guidance on what level of contact constitutes sufficient nexus. As stated, the hangar location is sufficient to establish nexus. However, it is possible that landings in other states, even infrequently, can create nexus with such states. In this circumstance, other factors are generally required, with factors commonly considered including regularity of travel to the state, the total days in the state during a “testing period,” and whether the taxpayer has other connections to the state (e.g. – payroll, property, transactions, tax return filings, etc.). Proper advance planning with experienced aviation tax counsel can mitigate such tax risk. It is important to note that the ability to mitigate such tax risk will be severely compromised if such planning occurs after the aircraft has been operated, or more commonly, after receipt of a use tax bill from such other state(s).
In the event additional use tax nexus is unavoidable, a taxpayer may be eligible to receive credit for taxes already paid to the original taxing state. Generally, states give a credit for “like” or “similar” taxes paid to another state. So, assuming that the taxpayer paid, or is paying (if a leasing structure), a meaningful amount of taxes to State A, the challenge is to convince State B that the taxes paid or being paid to State A are “like” or “similar” taxes. It is equally important that the aircraft was not used in State B prior to being used in State A, in as much as State B can deny the credit on the basis that State A owes the credit and not State B.
While avoiding, or paying, sales tax is relatively straightforward, use tax planning is complex and cumbersome. The tax planning intricacies should also factor in a healthy measure of practical guidance. Once again, experienced aviation tax counsel should be engaged, in advance of the aircraft purchase. As always, the “big picture” of the flexibility of corporate aircraft utilization is paramount!
More information on GKG Law's Business Aviation Practice can be found here.
This article was originally published in GKG Law articles on May 9, 2019.