Aircraft Club May 2024: Substantiating business aircraft use

In detail

Section 274(d) provides that no deduction is allowed for expenses for travel, gifts, or listed property unless the taxpayer substantiates the expenses, generally by adequate records. Because company aircraft is listed property subject to these rules, a taxpayer must substantiate (1) the amount of the expenses, (2) the time and place of the use of the aircraft, and (3) the business purpose of the use of the aircraft.

To substantiate by adequate records, a taxpayer must maintain an account book, diary, log, statement of expense, trip sheets, or similar record, and documentary evidence sufficient to establish each of these elements. Generally, flight logs and expense tracking systems will provide the information required to document the amount of the expense and the time and place of the aircraft use.

Documentation of business purpose may include interviews with the passengers and objective material such as agendas or itineraries of business meetings or conferences. The degree of detail necessary to establish business purpose depends on the facts and circumstances. Preparation of documentation should occur at or near the time of the flight, when relevant individuals have full present knowledge of the business purpose of the flight. Documentation obtained later has a lower probative value than contemporaneous records and must be supported by other corroborative evidence. Numerous cases have characterized a taxpayer’s testimony and other non-contemporaneous evidence of business purpose as unreliable and vague, and denied a deduction for the expenses.

Observation: The 2017 tax reform act (the Act) amended Section 274(a) to disallow the deduction for expenses for entertainment activities, which previously was allowed for costs directly related to a taxpayer’s trade or business. Accordingly, expenses generally are disallowed for the use of an aircraft to transport passengers to business entertainment events or activities. The Act also deleted entertainment expenses from the more stringent substantiation standards of Section 274(d), although the exceptions to Section 274(a) disallowances continue to apply that allow deductions for some entertainment expenses. Deductible entertainment expenses paid or incurred after December 31, 2017, may be subject to substantiation only under Section 162. However, because regulations implementing the amendments have not been issued, taxpayers may wish to maintain documentation substantiating these expenses under Section 274(d).

Observation: If an employee travels for personal non-entertainment reasons aboard an employer-provided aircraft, then the expenses associated with this use are not subject to the entertainment disallowance rules. Rather, the employer is permitted to deduct the expenses by appropriately reporting the value of the flight (rather than the amount of the expenses) as wages to the employee and keeping a detailed explanation of the personal non-entertainment purpose.