The Advisors' Blog

– Broc Romanek, CompensationStandards.com

A while back, Ruth Wimer of McDermott Will taped a podcast with me on personal use of aircraft. Since Ruth wrote out her answers to some of the questions, I thought I would share them since they are so useful. Below is one answer:

The first point I would like to make about the common snafus in providing personal use of aircraft disclosures, is that there are actually three sets of rules, two from IRS, and the third from the SEC, that require documentation and substantiation of the use of the aircraft. The first IRS rule which virtually all companies with business aircraft are aware of, is the requirement by the IRS to include in income, the fair market value of personal flights provided to the executive or to his guests.

Although there are two different methods for imputing income under this rule, the more popular is the so called “SIFL” rule which is the Standard Industry Fare Levels, meant to equate to first class airfair, despite the fact that the plane transportation provided is more akin to a charter flight. Accordingly, most companies diligently track all personal travel, calculate the SIFL amounts, and put it in as taxable income on a W-2 or Form 1099 – the later for independent contractors such as Directors.

The other IRS rule is the relatively new deduction disallowance which hits the company that owns the aircraft and it is related to providing certain kinds of personal travel, that is, personal travel which looks like “entertainment, amusement, or recreation.” Therefore, for the company’s tax return, this new disallowance rule will deny a deduction for the fully loaded costs attributable to any passenger traveling for personal purposes which is also entertainment, amusement or recreation.

Therefore, an executive commuting from his residence to his primary office, or traveling to a funeral, would result in taxable income under the SIFL rules, but result in no deduction disallowance to the employer company which owns the aircraft. If the same executive, however, takes a vacation with guests or family, then the employer company would be required to determine fully loaded costs allocable to that flight and subtract it from the deductible expenses related to the aircraft on the company tax return.

Now, as I mentioned, the SEC has its own reporting and disclosure rules which require that for Named Executive Officers and Directors, perquisites be quantitatively disclosed, as well as requiring certain narratives even if there is no quantitative disclosure. In short, if all perquisites exceed 10K, then the footnotes would need to include a description of any personal airplane use even if it did not need to be quantitatively disclosed. If the airplane personal use “Aggregate Incremental Costs” exceed $25,000 or 10% of all perquisites, then that value needs to be disclosed. My apologies for the long introduction, but it is necessary to understand why there are so many snafus with respect to SEC disclosure.

The SEC’s definition of “Aggregate Incremental Costs” is not defined, and the practice is to use the costs which are incurred which are incremental for a particular flight wherein personal use exits. Therefore, If an executive is flying on business, and a guest such as a spouse is also on board, then since there were little or no additional costs, other than perhaps additional catering, then no dollar amount needs to be disclosed.

In a recent shareholder derivative case, the plaintiff alleged misreporting for SEC purposes stating that some of the fixed costs should also have been reported since the personal use percentage was significant. In the same case, it was alleged that all director flights to board meeting should be reported as a perquisite, which is a gross over generalization, as sometime a board member flying to a board meeting is in fact commuting which is a perquisite, but more often, attendance at a Board meeting is away from the primary work location for that Board meeting and therefore is not a commute and the result would be no personal aspects to that flight/no perquisite.

The common snafus also include, and this is for IRS as well as SEC, misidentifying flights which are personal as business flights, such as spousal travel to business meetings. Getting the number wrong for SEC sometimes, but not often happens, – case in point, a recent proxy statement filing showed the use of the IRS SIFL rates for SEC purposes which refers to costs, not the value of the flight to the executive.