Tuesday, September 18, 2012
Aviation Taxes 2012
A guide to the new IRS regulations
To be tax deductible, an expense must be ordinary, which is considered to be normal, usual or customary relating to the particular business environment for which the expense was incurred as well as be necessary to the particular business environment, which is defined as being appropriate and helpful to the taxpayer's trade or business. This is a classic definition from Code Section 162.
In the case under discussion, the taxpayer was involved with real estate as a commercial realtor as one of his business interests. For three years, he hired a pilot to assist him in taking aerial photos of property he was trying to list and sell. Then he got the idea to get his pilot's license and his own plane and save the expense of hiring a pilot. This is somewhat reasonable on the surface. But he ran into the following problems with the judge. He couldn't convince the judge that becoming a pilot maintained or improved his skills as a commercial realtor. So there went the education angle. He had no valid argument why he was in a better business position than he was before when he hired a pilot for the three preceding years. So there went the ordinary and necessary argument. The taxpayer failed to produce receipts and/or invoices for the flying lessons and other expenses, and he stated to the judge that he didn't know that he needed to keep those records. So there went the burden of proof issue. And there went the case.
Every case and situation stands on its own. The courts will consider and allow deductions for flying lessons where the deduction is legitimate. But there has to be a bona fide business purpose and you must meet the burden of proof standard. Oftentimes, these deductions are generated by a closely held business that's owned by one person or a small number of individuals. The owner(s) agree that there's a bona fide need for a plane, and the economics of getting someone ticketed and owning a plane are more beneficial than the cost of leasing or chartering an aircraft or commercial airline travel. As such, one lucky soul gets the pleasure of learning how to fly. When I have this situation, I recommend that his job description and duties be revised to include that this person will acquire their pilot's license, maintain their currency and maintain their medical at all times. This is so the plane can be flown at a moment's notice. I also recommend that a statement be put in the corporate annual minutes describing the benefits of airplane ownership and reaffirming the business decision to continue with the ownership and expenses of the plane.
There are approximately 15,000 airports in the United States. Of these airports, approximately 5,000 have paved runways. Of these, 376 airports have regularly scheduled flights. Also, 86 airports process more than 1 million passengers a year. Only 25 airports process more than 10 million passengers a year. If long- distance travel by your company is an issue, I suspect that there are many small airports that can handle the smaller planes of general aviation that can get you to your destination a lot easier than going through a major terminal. The cost of getting an executive out in the field, getting their job done and returning them back to the office will probably be less than going the commercial route when you consider all of the time costs associated with the trip. Time is money.
Pilots want to increase their skills and expertise. As such, they want to advance their ratings. And this will be a problem when it comes to being tax deductible. Sooner or later, you'll become so rated that you'll have qualified yourself for a new profession. You technically can get a job as a commercial pilot. It doesn't matter that you have no intention of doing so; the defining point is that you have qualified yourself for a new profession. And that fact will disallow the deduction.
General aviation will be greatly impacted by these and other changes for 2012. The time and effort to keep up with the tax arena will be a big benefit as you deal with your tax preparation.
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