The IRS has recently issued guidance that concluded that payments for common services that aircraft management companies provide, such as pilots, maintenance services and logistics, can be subject to excise tax as payments for
Our present air traffic control system is, in a phrase, a relic of the 1950’s, and it is about time that our country moves towards a “smarter” and safer system for managing air travel. The Next Generation Air Transportation System (NextGen) is the FAA’s plan to modernize the National Airspace System (NAS) through 2025.
NextGen is intended to replace the present radio-based communications network with a satellite/GPS based system that allows for more flexibility in how aircraft are spaced and landed. It is intended to reduce the amount of communication necessary between pilots and ground personnel, and is geared towards allowing the capabilities of the aircraft define who can fly where and how. This in turn opens up the possibility for faster and more direct routes between takeoff and landing.
The program encompasses other regulatory changes to achieve weather forecasting, data networking, and digital communications improvements as well.
Naturally, such an effort requires time, coordination, and of course, money. FAA has requested $1.14 billion for the NextGen program in fiscal 2011, a 32 percent increase from fiscal 2010. Consumed with health care issues, Congress has yet to pass a final Federal Aviation Administration bill incorporating NextGen funding, although an extension is in place.
However haltingly, it is encouraging that our nation has taken steps towards modernizing our air travel infrastructure. Stay posted with us, and the FAA, at http://www.faa.gov/news/fact_sheets/news_story.cfm?newsId=8768.
The IRS has initiated a National Research Program (NRP) aimed at closing the “tax gap” in employment tax matters. The Service has randomly selected 6,000 taxpayers to “participate” in the program, some of whom might then graduate to full-blown employment tax audits. Employment tax issues are especially problematic due to the frequency with which you must file returns, which increases the risk of error, and the draconian “trust fund” penalty that can be imposed for willful violations of the withholding rules.
The study will focus on traditional payroll issues such as withholding and the classification of de-facto employees as “contractors”, officer compensation programs, employee expense reimbursement programs, timely reporting and payment of payroll tax and so forth.
Another area to be examined that is particularly important for aircraft owners is the treatment of fringe benefits. The fringe benefit valuation provisions – the “SIFL” rules – governing certain types of personal aircraft use require extensive record-keeping and calculation to determine the correct amount of “compensation” a “specified individual” should receive for such use. Thus, if an executive is supposed to receive SIFL income, it should come as a part of his or her paycheck from the company (from which FICA taxes are withheld), and not be treated as a return of capital or 1099 income. This could be especially problematic for owner-pilots, whose small businesses may or may not be compensating their officers as employees (itself a tricky area for another day).
Timing is also an important element in properly treating SIFL income as “compensation”. One calculates SIFL compensation on a fiscal year, that is, you can elect to “run” your flight logs for the period beginning November 1 of the preceding year to October 31 of the following year. If the imputed income is to be added to the payroll, therefore, you generally have only about a month to get it done. A scramble under the best of circumstances.
So, what to do, what to do? The obvious (and legally correct) answer is to keep contemporary records so that most of the data is in place by the end of October, and you can run your fringe benefit through payroll by the end of the year. Failing this, however, consider the following approaches with your tax professional:
(1) Withhold employment taxes on an estimated amount of SIFL income, perhaps based on prior years’ usage. While the number may not exact your good faith effort goes to the materiality of any tax error (if you don’t withhold enough);
(2) Recognize your fringe benefit income the following year (if you must). Even if late this is consistent with the rule that the fringe benefit is treated as “compensation”;
(3) If the company issues the specified individual a 1099, carefully document how this “income from self-employment” is taxed.
– Ari Good, Esq.