Month: August 2012

Aircraft Personal Use: SIFL Rates For The 2nd Half Of 2012

Aircraft Personal Use:  SIFL Rates 2012

This article provides the “ingredients” used in calculating Standard Industry Fare Level (SIFL) charges for personal non-entertainment (PNE) use of aircraft. 
For the uninitiated, the SIFL calculation is used to impute income (compensation) to the executive using the plane for a narrow class of non-business, but non-leisure related activities.  PNE use can include, for example, the use of the plane to attend a family funeral.  The expenses attributable to these flights are generally deductible so long as the executive recognizes the SIFL phantom income.

The most updated SIFL rates for flights taken between 7/1/12 -12/31/12 are:

  • 0 to 500 miles = $.2569 per mile
  • 501-1,500 miles = $.1959 per mile
  • Over 1,500 miles = $.1884 per mile

These charges are calculated “marginally” like income tax rates, that is, you calculate the SIFL mileage charge for each stratum and then add them together. Example:  1,000-mile flight will require calculating 500 miles x $0.2569, plus 500 miles x $0.1959.

This figure is then multiplied by an “aircraft multiple” that depends on two additional factors, first, the Gross Takeoff Weight (GTOW) of the plane, and second, whether the individual generating the SIFL charge is a “control” versus a “non-control” employee.  In essence, the larger the plane the larger the multiplier, since SIFL is a “special valuation rule” designed to capture the theoretical value of a first class ticket aboard that type of plane.  Also, control employees generate more SIFL income than non-control employees, in theory an adjustment that attributes more income to owners, directors and officers than to other employees.  In some cases this reduces the overall bill (a non-control employee multiplier for a small airplane is as low as 15.6%), and in others greatly expands it (a control employee flying a heavy jet multiplies the miles by 4).  Call me for the exact figures and some things to look out for.

Top off this figure with a “terminal charge”, which is updated twice per year.  The terminal charge for the second half of 2012 it is $46.97 per SIFL-qualified flight.

(Updated 08/23/2012)

Federal Excise Tax Audits: How smart decisions can keep you out of trouble

The Federal Excise Tax (FET) on commercial flights, by definition, is a tax on “amounts paid for transportation by air of persons” under IRC Sec. 4261. This generally refers to transportation by air that begins and ends in the United States. Traditionally non-transportation services such as charges for meals, hotel accommodations and so forth have not been subject to FET, nor have aircraft management services that do not relate to particular flights.

Federal excise tax audits haven’t always been a bone of contention for smaller private aviation companies. More recently, however, management companies, brokers and owners have growing concerns that they may be next on the list to be audited.

The FET has been an easy way for the IRS to target these companies for audit based on the somewhat loose definition of what makes an “amount paid for transportation”. Many private aviation companies charge one fee that includes both transportation and non-transportation components. The operator may subtract the amount received for non-transportation services, and pay the government its 7.5% on the “true” transportation amount, fine. A one size fits all invoice however, while customer friendly, can create a headache. A best practice is to break out the charges for transportation and non-transportation charges for everyone to see. Why make your life hard and the auditor’s job easy?

And what of charter brokers? Upon audit the IRS could view a charter broker as assuming the burden of making sure the FET is paid, despite the fact that he isn’t responsible for the operator’s taxes. The broker could be fingered as a responsible party having touched the taxable amounts. One suggestion: include language in your brokerage agreement that clearly specifies that it is the operator who collects and is responsible for paying “any and all applicable taxes”.

Further, even if you collect a lump sum from you customer, make this separation before sending it along to the operator. You might even consider making two separate payments to the operator based on what THEY consider their taxable or non-taxable services. Be ready to present a detailed account of what you collected, for what, from whom, and who is required to calculate and remit the tax. To a numbers guy numbers speak louder than words.

Contact us today for a brief consultation to make sure your tax records are in line both you’re your business practices and the best practices when it comes to FET. With these matters squared away, and the threat of audit diminished, you can focus your energies where they belong: your business.