Final regs. issued on entertainment use of business aircraft.

On July 31, the IRS issued final regulations relating to the disallowance under Sec. 274 of deductions for the use of business aircraft for entertainment (T.D. 9597). The final regulations adopt, with some modifications, proposed regulations issued in 2007 (REG-147171-0S), which in turn followed principles first expressed in Notice 2005-45. (For prior coverage, see Pressey, Stebbens, and Koopmans, "New Prop. Regs. Clarify Tax Deductible Entertainment Use of Private Aircraft," 38 The Tax Adviser 646 (November 2007).)

In 2004, Congress limited expense deductions for executives' use of business aircraft for entertainment (Sec. 274(e)(2)). This provision limits the deductibility of personal entertainment use by those with control over the business's costs (referred to as "specified individuals") to the amounts included in the specified individual's income or to the amounts of reimbursement. Specified individuals include officers, directors, more-than-10% owners, 10% shareholders, 10% equity partners/members, and managing partners/members of a partnership/LLC.

The regulations define "entertainment air travel" as "travel aboard a tax-payer-provided aircraft for entertainment purposes" (Regs. Sec. 1.274-10(b)(2)). However, they also specify that "[e]ntertainment does not include personal travel that is not for entertainment purposes" (Regs. Sec. 1.274-10(b)(1)). The preamble to the proposed regulations explained that entertainment use does not include travel for business, medical purposes, attending a funeral, or participating in charitable events.

Disallowed expenses include variable costs such as fuel and landing fees, and fixed costs such as depreciation, hangar fees, pilot salaries, and other items not directly related to an individual flight. They also include interest expense if the underlying debt is secured by or properly allocable to an aircraft used for entertainment. A taxpayer may aggregate expenses for aircraft of similar cost...