Maximizing the deduction for personal use of an aircraft.

• Author: Ebner, Joshua C.

With the promulgation of the American Jobs Creation Act of 2004 (AJCA), the deductibility of expenses for the personal use of an employer-provided aircraft has been severely limited. Under prior law, a company was allowed a full deduction for such use if the employee recognized in income an amount based on a fair market value (FMV) or standard industry fare level (SIFL) value that generally was significantly less than the deduction claimed. After the AJCA, this disparity has been eliminated; a company generally cannot deduct an amount in excess of the income the individual recognizes.

Notice 2005-45 provides rules and allocation methods to correctly apply the deduction limit; however, potential planning opportunities also arise.

Entertainment Use

Under Sec. 274(a)(1)(A), no deduction is allowed for an activity generally deemed to be entertainment, amusement or recreation, unless the taxpayer establishes that it is directly related to or associated with the active conduct of a trade or business. Sec. 274(a)(1)(B) disallows deductions for facilities related to such activities.

Intended to overturn the decision in Sutherland Lumber-Southwest, Inc., 114 TC 197 (2000), aff'd, 255 F3d 495 (8th Cir. 2000), acq., AOD 2002-02, AJCA Section 907'S amendments to Sec. 274(e)(2) and (9) specifically disallow expenses related to entertainment facilities to the extent "specified individuals" do not recognize the related income. Thus, if a specified individual does not recognize as income the full amount of an entertainment-related deduction, the excess cannot be deducted. However, an individual can reimburse the employer for the specified amount to allow deductibility.

Specified Individuals

Under Notice 2005-45, a "specified individual" is either an individual who is subject to Section 16(a) of the Securities Exchange Act of 1934 or one who would be so subject if the company issued equity securities. This includes every person who is:

* The direct or indirect beneficial owner of more than 10% of any class of a registered equity security;

* A director or an officer;

* The direct or indirect beneficial owner of more than 10% of any class of a registered security if the company were an issuer of securities; or

* A person comparable to an officer or a director.

For partnership purposes, a specified individual is a partner who holds more than a 10% equity interest in the partnership, a general partner, an officer or a managing member of the partnership. For...