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Department Companies Section 2: Personal Use, Passive Activity, Depreciation, Owner-Basis
Preparation of Tax Returns for Company-Owned Aircraft Preparation of Owner-Pilot Tax Returns Ownership Structures, Avoiding Passive Loss Limitations and
Part 91: Section of the Code of Federal Regulations covering the general operating rules for aircraft. Aircraft operating under Part 91 rules may not engage in flights for hire
Part 135: Section of the Code of Federal Regulations governing aircraft “for hire” operations. Requires an FAA Operating Certificate. These operations are typically called charter flights, and often utilize company aircraft. Flight rules are generally more restrictive under Part 135 than Part 91
Dry Lease: Lease of aircraft only, with no pilot services or direct operating costs
Overlooking Bob’s point-to-point routing and calculating his SIFL leg-by-leg results in Bob paying unnecessary taxes! Taxable income from SIFL point-to-point routing
= $ 2,058 Taxable income from SIFL leg-by-leg routing
= $2,676 Results in additional taxable income of $618 to Bob
50% Seating Capacity Rule If employees traveling on company business fill 50% of
the passenger seats: Then no SIFL income is imputed for non-business travel by an employee No SIFL income is imputed for non-business travel by the employee’s
spouse or dependent children SIFL for guests of the control employee is computed at non-control
employee rates
Applies to: Employees Control-employee’s spouse and dependent children Control-employee guests Partners of a partnership that provides the aircraft
Permits executive to fly on company plane for non-business flights at reduced SIFL rates
Requires that a security study be performed. A separate study is required for family members if they travel alone. The study must conclude that a security risk to the executive exists
The security plan must be part of a complete security program (24 hours)
Provides “Safe Harbor;” use 200% multiple regardless of weight of aircraft Can result in significant savings to the employee for use of large
Calculating and accumulating the SIFL data can be tedious and time consuming
Excel spreadsheets are a low-cost, simple solution You must know all the rules Spreadsheets are prone to math errors Typically won’t meet the IRS documentation requirements
Computer software offers many advantages Our software is the only product designed for accountants and CPAs “Enter once” input for SIFL, cost disallowance, state tax, SEC, etc. Designed to satisfy IRS reporting and documentation requirements
Imputed Income (SIFL) Is Not A Deductible Company Expense
Imputed income is a non-cash fringe benefit Company reports SIFL on employee’s W-2 Employee reports on 1040, pays personal income tax SIFL imputed income is not deductible to the
Business Flights – Flights that are incidental to the companies’ business No SIFL, fully deductible
Non-Business Non-Entertainment Flights (NBNE) –Flights that are for business, but not the business of the company owning or operating the aircraft SIFL, no cost disallowance
Entertainment Flights – Flights that are for transportation to activities that provide entertainment to the passengers SIFL and cost disallowance both apply
Specified Individual Entertainment reporting requires the presence of a
Specified Individual; if no Specified Individual is on the flight, then no entertainment disallowance
A Specified Individual is anyone in the company who is subject to section 16(a) of the Securities Exchange Act, or any individual who would be subject to it if the company were an issuer of equity securities subject to the Securities Act.
Specified individuals generally include officers, directors, 10% owners, principal financial officers, vice presidents in charge of a principal business unit division or function
In determining the amount of expenses subject to disallowance under this section, a taxpayer must include all of the expenses of operating the aircraft, including all fixed and variable expenses the taxpayer deducts in the taxable year. These expenses include, but are not limited to:Salaries for pilots, maintenance personnel, and other personnel assigned to the aircraft; meal and lodging expenses of flight personnel; take-off and landing fees; costs for maintenance flights; costs of on-board refreshments, amenities and gifts; hangar fees (at home or away); management fees; costs of fuel, tires, maintenance, insurance, registration, certificate of title, inspection, and depreciation; interest on debt secured by or properly allocated (within the meaning of §1.163-8T) to an aircraft; and all costs paid or incurred for aircraft leased or chartered to the taxpayer. 1.274-10(d)(1)
Disallowance Calculation Example 2,000 mile flight with 3 business passengers and 2 entertainment
passengers; example using Occupied Seat Miles method
The objective is to calculate an entertainment disallowance percentage. The taxpayer may use the lowest of the four (4) methods allowed for calculating the percentage
Three legged flight Leg 1: 6 hours, A-B, 12 pax, 8 business, 4 entertainment Leg 2: 4 hours, B-C, deadhead (requires “ghosted” passengers) Leg 3: 2 hours, C-A, 12 pax, 6 business, 6 entertainment Total 12 flight hours and 24 pax, 14 business, 10 entertainment
Deadhead flights – IRS Example Flight-By-Flight Method
Flights with a combination of business and entertainment legs plus a return leg
The return leg may be prorated according to the ratio of OSH, OSM, or F-by-F passengers on the other legs
The entertainment cost of a multi-leg trip is the total cost of the flights minus the cost of the flights that would have been taken without the entertainment segment or segments (IRS definition)
Open-Jaw Flight – IRS Example Three legged flight, one specified individual on each leg Leg 1: 2 hours business A-B Leg 2: 3 hours entertainment B-C Leg 3: 4 hours return C-A Total 9 flight hours
Prorate
Step 1: Calculate as if flight was only businessStep 2: Add Entertainment hours/miles to
reach total
Allocation Calculation9 Total flight hours‐4 Hours if trip was only business (A‐B + B‐A)5 Entertainment hours
Step 1: Log flights and analyze each passenger as onboard for business, NBNA, or entertainment purposes
Step 2: Calculate entertainment cost limitation percentage for the year
Step 3: If reporting MACRS, calculate adjustment to straight-line depreciation (optional)
Step 4: Add direct operating costs, ownership costs and depreciation; multiply by the disallowance percentage, add back the SIFL imputed income and list the disallowance amount as a contra-expense on the tax return
Step 1: Log flights and analyze each passenger as onboard for business, NBNA, or entertainment purposes
Step 2: Calculate entertainment cost limitation percentage for the year
Step 3: If reporting MACRS, calculate adjustment to straight-line depreciation (optional)
Step 4: Add direct operating costs, ownership costs and depreciation; multiply by the disallowance percentage, add back the SIFL imputed income and list the disallowance amount as a contra-expense on the tax return
Step 1: Log flights and analyze each passenger as onboard for business, NBNA, or entertainment purposes
Step 2: Calculate entertainment cost limitation percentage for the year
Step 3: If reporting MACRS, calculate adjustment to straight-line depreciation (optional)
Step 4: Add direct operating costs, ownership costs and depreciation; multiply by the disallowance percentage, add back the SIFL imputed income and list the disallowance amount as a contra-expense on the tax return
Use of Straight-Line Depreciation for Disallowed Depreciation
“Solely for purposes of paragraph (d)(1) of this section, a taxpayer may elect to treat as its depreciation deduction the amount that would result from using the straight-line method of depreciation over the class life (as defined by section 168(i)(1)…”
Means taxpayer has the option to substitute straight-line depreciation for the disallowed portion of depreciation
Disallowed depreciation is added back to the basis of the aircraft
§1.274‐10 (d)(3)(i) Special rules for aircraft used for entertainment 10302
If Part 91 is the predominant use, use MACRS 5-year If Part 135 is the predominant use, use MACRS 7-year Reduce depreciation by the disallowance percentage Taxpayer has the option to convert the disallowed
depreciation to straight line Report depreciation at gross amount on the Form 4562 Adjust for percentage of disallowance and optional
conversion to SL in workpapers Include depreciation adjustment in the Sec. 274
Step 1: Log flights and analyze each passenger as onboard for business, NBNA, or entertainment purposes
Step 2: Calculate entertainment cost limitation percentage for the year
Step 3: If reporting MACRS, calculate adjustment to straight-line depreciation (optional)
Step 4: Add direct operating costs, ownership costs and depreciation; multiply by the disallowance percentage, add back the SIFL imputed income and list the disallowance amount as a contra-expense on the tax return
Upcoming Webinars February 6, 2014: SIFL Income Calculations for Employee Use
of Company Aircraft (Advanced Level Course). An in-depth study of the rules and techniques for calculating SIFL imputed income. Many example flights. 1 hr. CPE and CLE
February 13, 2014: Reporting Entertainment Cost Disallowance Adjustments (Advanced Level Course). What’s new in the Final Regulations, analyze calculation methods, special flight types, such as deadhead and open jaw, and 11 strategies for minimizing the disallowance. 1 hr. CPE and CLE
National Association of State Boards of Accountancy (NASBA) Group Internet Based Programs sponsor ID 108984
Florida Bar Association Continuing Legal Education Accreditation Provider # 283052
Prepares SIFL reports ready for use by payroll department
Cost disallowance reports ready for accounting department
Federal Excise Tax reporting SEC incremental cost reporting State tax reporting Cost center reporting No date restrictions; input last year’s flights as well
SEC Reporting Names and tracks all seven principal and highly
compensated executives according to SEC reporting rules Tracks dates of applicability for each reportable executive Assigns incremental hourly cost amount to each aircraft in
the company’s fleet Prints individual and combined reports for each
reportable executive Wolcott & Associates, P.A. can provide a compilation
report explaining the methods for computing the incremental cost and executive compensation listed in the SEC reports and proxy statement
Cost Center Reporting Assigns a cost per hour to each aircraft in the fleet Allows an unlimited number of user definable cost centers User assigns flight legs to specific departments or cost
centers Allows companies to bill aircraft use to divisions,
Annual subscription is $3,995 (Enterprise version) Provides 12 months of program access Unlimited use; no date or aircraft restrictions Custom programming and reports available Aviation CPAs from our parent company provide 2
hours of free support. We take you through setup and flight recording. Additional support available
Call 866-791-6092 www.flighttaxsystems.com to sign up!