Category: Internal Revenue Service

SIFL Rates Rise for the Fourth Consecutive Term

SIFL Rates
SIFL rates on the rise again.

SIFL rates are important numbers used to calculate the taxable income you receive when taking a personal flight on employer provided aircraft as a fringe benefit.  The U.S. Department of Transportation recently released new SIFL rates for the 1st half of 2013 and there was an increase of 3.33% overall.  This marks the fourth consecutive term that SIFL rates have significantly increased, with a total hike of over 17% since July of 2011.  The following table shows these new numbers:

 

 

SIFL Rates for 1st Half of 2013

Time Period of Flight 01/01/2013 – 06/30/2013
Miles: 0 – 500 –> .2655
Miles: 501 – 1500 –> .2024
Miles: > 1500 –> .1946
Terminal Charge –> $48.54

Aircraft Multiplier

Weight Class

Control Employee

Non-Control Employee

< 6,000 lbs. 62.5% 15.6%
6,001 – 10,000 lbs. 125% 23.4%
10,001 – 25,000 lbs. 300% 31.3%
> 25, 000 lbs. 400% 31.3%

Crunching these numbers, a control employee would have a $598.59 taxable fringe benefit for a 750-mile flight, a 3.23% increase from the prior term.

If you’re unfamiliar with SIFL rates and whether they may apply to you, please read my earlier blog post.   http://goo.gl/Bfmx6

–          Ari Good

Ari Good, JD LL.M. is the Shareholder of Good Attorneys At Law, P.A.  Mr. Good received his BA, With Distinction, from the University of Michigan in 1993, his law degree from the DePaul University College of Law in 1997, and his LL.M. (Masters of Law in Taxation) from the University of Florida.  A long-time supporter of the general aviation community, Mr. Good serves aircraft buyers, sellers, dealers, brokers, flight schools and commercial operators worldwide in contractual, operational and tax matters. The firm’s services include federal income tax, state sales and use tax and excise tax planning, and defending both state and federal tax audits.  Mr. Good is a frequent speaker in aviation tax law and a proud member of The Florida Aviation Trades Association and NBAA.

Deduct Your Flying Lessons

Deduct your flying lessons:  Can you take a tax deduction for your flying lessons?  The short answer:  yes, but it depends on your situation and the circumstances. To justify such a deduction, a taxpayer must show that the lessons are a reasonable and necessary business expense and not just helpful or useful.  Alternatively, a taxpayer could argue that the lessons are an educational expense necessary for a job that requires private flight.  The pilot must take due care to make these decisions up front so that he has a good defense in the event of an audit. Unlike in most other areas of US law it is the taxpayer’s burden to prove that a claimed deduction is legitimate.

In early 2012, a U.S. Tax Court considered this question and ruled that an experienced commercial real estate broker’s flight lessons were non-deductible.  The broker’s job involved identifying large properties to sell and drafting detailed brochures for prospective buyers.  From 2005 to 2007 he chartered airplanes to assist in finding and evaluating such properties.  During these flights, a licensed pilot flew the airplane while the broker took photographs that were included in the brochures.  To avoid future expenses of chartering flights the broker took flight lessons and purchased a Cessna 172s aircraft to perform the same task.  He subsequently claimed those flight lessons as an expense of $33,000.00 on his 2007 federal income tax return.  When the claimed deduction was challenged in court, however, he could not provide any receipts or invoices documenting the flight lessons, and therefore could not take a tax deduction for those flying lessons.

Deduct your flying lessons
Can you take a tax deduction for flying this big boy?

Upholding the IRS’ determination, the Court found that the broker failed to prove that flight lessons were an educational expense required for the business of a commercial Realtor   The Court concluded that while evaluating properties from the air may be helpful to a Realtor this particular broker had been able to do so earlier without the necessity of actually piloting a plane.  He could not explain why flight lessons were now required in order to view the properties or obtain aerial photographs.  Regarding the claimed business expense, the broker failed to provide evidence that flight lessons are normal, usual, or customary for commercial Realtor.

Adding insult to injury, the Court made a point of saying that the broker had not acted in good faith for claiming the subject deductions and upheld the 20% penalty assessment.  A taxpayer may be penalized if they act negligently or disregard (careless or otherwise) the tax law.  The Court noted that the broker was a sophisticated taxpayer with 20 years of experience as a licensed financial advisor and commercial Realtor   The Court similarly dismissed the broker’s defense that he just relied on professional advice in setting up his airplane structure.   The Court found broker had also erred in failing to keep financial records regarding the cost and purpose of the flight lessons.

These deductibility rules apply not only to the novice aviator but also those with years of flying experience.  As long as a taxpayer can justify the claimed deduction there is no rule barring that person from advancing their education and improving their rating, however, the taxpayer must continue to demonstrate that such expenses are an ordinary and necessary part of his existing business.  Cases in which the pilot deducts flight lessons in preparation for another career (such as moving from a general aviation pilot to an airline or transport pilot) seldom favor the taxpayer.

Careful planning can avoid the pitfalls illustrated above.  Here the deductions were disallowed not because of a “per se” rule against claiming a deduction for flight lessons but because he failed to demonstrate and document the connection between his real estate business and private flight.  The result may have been different, for example, if there was no viable option for sustaining his real estate business other than to fly privately, perhaps if the taxpayer owned real property spread over a large geographical area or in hard-to-reach places.

Consulting with a knowledge and experienced aviation tax advisor will ensure you’re on the right side of tax law (or a court’s opinion).

IRS Federal Excise Tax Surprise – New Rules For Aircraft Management Companies?

IRS Federal Excise Tax
IRS excise tax & aircraft management companies:  and you thought the catering was exempt

The IRS’ new view of federal excise tax on aircraft management services in unwelcome indeed. To recap, in an IRS Chief Counsel Memorandum Re Federal Excise Tax and Aircraft Management Companies, the IRS is taking the position that aircraft services such as hiring and providing pilots and management services, even for part 91 aircraft, are “amounts paid” for “transportation services” and therefore subject to federal excise tax.  This in essence has the potential to raise general aviation services costs by 7.5%, a federal excise tax surprise that neither aircraft management companies nor aircraft owners need in this environment.

It has never been disputed that ” amounts paid” for commercial flights under Parts 121 or 135 are subject to excise tax as “taxable transportation”, and the price and availability of these flights reflect this.  Part 91 owners and operators make a conscious decision to assume more risk in retaining “operational control” of their flights and pay management companies for collateral services in making pilots, fuel and services available.  We could be left under the IRS’ new policy where a private aircraft owner would have to pay excise tax for flights over which he still has full legal liability.  This is clearly a surprise when it comes to federal excise tax, for the owners and aircraft management company alike.

Unfortunately there is also a “gotcha” factor here.  One might conclude that the IRS’ apparent aggressiveness with respect to auditing, and potentially assessing, federal excise tax against aircraft management companies is designed to catch us off guard.  There are a couple of problems with this.  First, a Chief Counsel opinion details the Service’s interpretation of existing law.  It is not equivalent to the Internal Revenue Code, regulations or Tax Court decisions, and therefore forms a questionable basis upon which to set aircraft management companies up for formal federal excise tax audits.  Second, if in time aircraft management companies are deemed to be receiving “amounts paid for taxable transportation” for support services, the industry must be given some reasonable opportunity to adjust to this without facing retroactive application of a brand-new interpretation along with the interest and penalties that go with it.

Call me for a free phone consultation if you think you may be subject to the new federal excise tax rules.  877.771.1131