Page 16 - Nov24

Tax Planning:
Consider Audit Risk for Business Aircraft
“If you write off a business aircraft, that’s a huge red flag and you will be audited.”
This is a very common sentiment I hear when speaking to prospective aircraft owners as well as tax advisers across the country. IRS audit risk is a very important planning consideration as we design an ownership structure for our clients. The art of aviation tax planning is to devise an ownership structure that satisfies the myriad of competing enforcement agencies: IRS compliance and audit risk, Federal Aviation Administration regulations compliance, state sales and use tax strategy, financing and banking requirements, etc.
With proper planning, getting audited by the IRS is still an extremely rare occurrence. Certain reporting scenarios are indeed high risk, which will draw attention from IRS auditors. Staying away from these high-risk reporting scenarios will be the key to stay under the IRS audit radar. For example, if you report your business aircraft on a Schedule C sole proprietorship tax form—without other business activities—your audit risk augments significantly.
14 • KING AIR MAGAZINE
Defending an IRS Audit
Even though it is a rare occurrence, we advise our clients as if they will be audited. Keeping extremely detailed records to support the business use of their aircraft is of utmost importance. If you are audited, the key to success is to establish that the aircraft is ordinary and necessary to support your business activities and support this claim with contemporaneous documentation. The burden of proof rests with the taxpayer.
Handling of Personal Use
The regulations on how personal use is handled have changed over the years. Personal use of a business aircraft is the focus for the IRS due to the perceived abuse by corporate executives. Reimbursing your company for personal use is problematic in many aspects. Having dry leases with principals for their personal use is cumbersome. Understanding the current fringe benefit rules and applying the correct classification of flights can streamline the compliance process and avoid costly mistakes.
by Daniel Cheung, CPA
NOVEMBER 2024