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April 2021
A taxpayer generally must include the value of personal travel on an employer-provided aircraft in an employee’s gross income. Under Reg. 1.61-21(b), the value of a fringe benefit generally is its fair market value. If the special standard industry fare level (SIFL) valuation rules do not apply, the value of a flight must be determined under the general fair market value rules and is based on the charter rate.
Under the charter rate method, income is imputed to an employee for a personal flight in the amount that an individual would have to pay in an arm’s-length transaction to charter the same or a comparable aircraft for that period for the same or a comparable flight. The amount also depends on whether the aircraft charter would include a pilot (rather than, for example, the employee piloting the aircraft). The charter rate generally is allocated among the employees on the flight for personal purposes.
Observation: The charter rate method typically results in a much higher income inclusion to an employee for a personal flight on an employer-provided aircraft than the SIFL method.
An employer may not value a flight based on the cost of a first-class ticket on a commercial airline.
The regulations provide an example of applying the charter rate method to two employees flying for personal purposes, one of whom is traveling in part for business.
Employee B is traveling from New York to Los Angeles for personal reasons. Employee C also is traveling from New York to Los Angeles for personal reasons but needs to stop in Chicago for business.
The stop in Chicago is not taken into account in calculating B’s imputed income. The amount imputed to Employee B is the charter value of a flight from New York directly to Los Angeles.
Chicago is a business destination for C. Consequently, the trip from New York to Chicago is a business trip and the value is not included in calculating C’s imputed income. The amount imputed to C is the charter value of a flight from Chicago to Los Angeles.
The values of the trips based on charter rates are as follows:
The combined charter value of the personal flights is $1,600, but the charter value of the entire actual flight is only $1,200. Thus, the charter value must be allocated between Employee B and Employee C.
The amount allocated to B’s and C’s flights is calculated as follows.
Charter value of B’s deemed personal flight $ 1,000
Divided by combined personal flight charter value ÷ 1,600
Multiplied by charter value of entire flight x 1,200
Income imputed to B $ 750
Charter value of C’s personal flight $ 600
Divided by combined personal flight charter value ÷ 1,600
Multiplied by charter value of entire flight x 1,200
Income imputed to C $ 450
A taxpayer that uses the SIFL formula in a calendar year to value any personal flight provided to an employee generally must use the SIFL formula to value all personal flights provided to employees during that calendar year. However, taxpayers may value the personal entertainment use of aircraft by specified individuals under the charter rate method but may value flights using the SIFL formula for other employees and for specified individuals traveling for personal purposes that is not entertainment.
Observation: Imputing income to specified individuals for personal entertainment flights under the charter rate method may reduce the amount disallowed under the regulations on entertainment use of company aircraft by specified individuals.
An employer or employee that makes certain errors on a federal income tax return in applying the SIFL rules for a personal flight on an employer-provided aircraft may not value the flight using the SIFL valuation rules, but must use the charter rate method. These errors are:
These rules, which require use of the charter rate method on a case-by-case basis, also are exceptions to the rule requiring consistent use of the SIFL rates or charter rate method.