The Advisors' Blog

This spring, Liz shared that the IRS was rolling out an “aircraft audit” initiative to evaluate whether companies have improperly deducted expenses for airplanes that were sometimes being used for personal travel, and whether individuals have properly recognized income relating to personal travel benefits. (See the Large Business and International Division’s list of active compliance campaigns, which now includes the “Business Aircraft Campaign.”)

According to the Baker McKenzie blog, The Compensation Connection, this focus has triggered calls to revisit the manner in which personal use of corporate aircraft is valued for income imputation purposes.

Shortly after the IRS announced this corporate aircraft campaign, six Senate Democrats … wrote to the IRS and the Treasury Department to laud this effort to crack down on executive personal use of corporate aircraft. In addition, the letter urged the IRS and Treasury to use its regulatory authority “to close the … SIFL loophole that allows corporate executives to undervalue, and minimize taxes paid, when they use corporate jets for personal travel.” SIFL stands for the Standard Industry Fare Level valuation method.

In recent informal discussions with the IRS and Treasury, representatives have indicated that they are seriously considering the Senate letter asking them to revisit the SIFL rates and thereby increase the rates at which personal use of the corporate aircraft is imputed into income. Although this would disadvantage employees and executives engaging in personal use of the corporate aircraft, it would have the silver lining of allowing companies to take a deduction for the higher amount included in an executive officer’s income for an entertainment flight.

Why is that? Well, for those of us who aren’t tax attorneys (that includes me!), the blog has this background/reminder:

SIFL is a method of valuing personal use of corporate aircraft flights that has been in the regulations for decades. Under the fringe benefit regulations, a company can impute income for personal use of a corporate aircraft using charter rates or using the SIFL rates. The SIFL rates are significantly lower than the charter rates and are meant to approximate first class fares or a multiple thereof. If a company uses the SIFL rates, the income required to be imputed to the executive for the trip is almost always lower than the actual expenses incurred by the company. …

There is a disadvantage to the company in using SIFL rates for entertainment flights by executive officers. … [I]n the case of executive officers, under Code section 274(e)(2)(B), if the SIFL rates are used to impute income, only the costs of the aircraft up to the SIFL rates are deductible. Costs incurred in excess of the SIFL rates are nondeductible. …

If the IRS were to change the valuation rules so that higher values had to be imputed into the executive’s income, under the statute as it currently stands, this would allow a higher deduction to the company for an entertainment flight by an executive officer.

– Meredith Ervine