In the past several years, there has been a significant interest in the acquisition or lease of business-owned aircraft. Aircraft ownership can be accomplished through a variety of legal entities, but most likely will be a limited liability company. There are several alternatives for computing personal-use compensation to an employee using an airplane for personal purposes.
An employee must include in gross income the amount by which the fair market value of a fringe benefit exceeds the amount, if any, paid by the employee, and the amount if any, specifically excluded from gross income by the Code. If an employee takes a flight on an employer-provided aircraft and that flight is primarily personal, the value must be included in the employee's income.
In general, there are two methods available for computing the personal use of employer-provided aircraft; the first method is almost always more favorable. This method is provided in Regs. Sec. 1.61-21 (g) and is referred to as the standard industry fare level (SIFL) method; see the example below.
Under this method, a three-step calculation is used to determine the personal-use compensation element. First, on a per-individual basis, the number of miles flown is multiplied by the SIFL cents-per-mile charge in effect for the period during which the flight was taken. This figure is then multiplied by the appropriate aircraft multiple, based on whether the personal use is for a control employee or a noncontrol employee. Finally, the terminal charge in effect for the period during which the flight was taken is added to the product determined above for each flight. The multiple to be applied is based on the aircraft's weight. For example, if the maximum certified takeoff weight of the aircraft is between 10,001 and 25,000 pounds, the control employee multiple is 300% and the noncontrol employee multiple is 31.3%. The SIFL cents-per-mile in the formula and the terminal charge are calculated by the Department of Transportation and revised semiannually. For example, for flights taken between July 1, 1999 and Dec. 31, 1999, the SIFL mileage rates ranged between. 1300 and. 1773 per mile, and the terminal charge was $32.41.
The determination of who is a control employee can become rather complex. Regs. Sec. 1.61-21(g)(8) defines a control employee as:
Employees who are officers of the employer, limited to the lesser of 1% of all employees or 10 employees;
The top 1% most highly compensated employees...