Tag: IRS

Bonus Depreciation Extended

President Obama last week signed the Small Business Jobs Act of 2010 into law, extending two key aircraft-friendly tax provisions for another year.  This legislation extends the “bonus depreciation” provisions that have been in place for some time that allow the taxpayer to deduct up to 50% of the purchase price of the plane in that year.  This legislation will also modify the separate “expensing” provision that allows up to an additional $50,000.00 deduction.  What remains of the plane’s basis is then further depreciated under the accelerated, five year, MACRS recovery period.  Put together, these provisions allow an aircraft purchaser (including fractional interest purchasers) to deduct the majority of the purchase price of within the first two years.

The taxpayer must qualify for these benefits, and there are some limitations: 

  • These provisions apply only to noncommercial aircraft predominantly used in a trade or business.  Personal use is accounted for separately and should be undertaken with professional tax advice.
  • The expensing allowance, under the new law, phases out dollar for dollar for aircraft over $2M. 
  • Bonus depreciation is permitted only for new aircraft, whose “first use” is in the taxpayer’s hands.  Used or refurbished aircraft do not qualify.  Fractional interests are considered “first used” by the taxpayer at the time of his purchase.
  • You must enter a written binding contract for his purchase of the plane and place a non-refundable deposit with the seller by the end of this year.  You would have to begin using the aircraft by the end of next year.
  • Depreciation deductions are “recaptured” when the aircraft is sold.  This can be deferred for some time either by continued ownership or by exchanging the fractional interest for another at a later time.  The real tax savings is the time value of the money not paid in taxes during this period.

Ari Good, Esq.

Avoiding IRS Audit Red Flags – How Does the IRS Select Returns For Audit?

IRS audit red flags
How does the IRS select returns for audit?

How Does The IRS Select Tax Returns For Audit?

What types of audit red flags does the IRS use to select returns for audit?  Under its “National Research Program” the IRS first comes up with a “baseline”, or theoretically acceptable, return for different types of taxpayer profiles.  The IRS uses special software to select returns that vary significantly from this profile.  This “DIFF” (Discriminate Function System) software assigns each return a “DIFF Score”.

The Service changes its algorithm from time to time.  While the IRS does not release the particulars of this process, it is common for taxpayers to learn what are the common “red flags” based on the types of audits people start seeing in the field.

From there an IRS auditor conducts an initial assessment of the computer-selected returns. The auditor determines whether to accept the return as-is or to select the return for audit.  If the IRS selects your return for audit you will receive a notice to this effect.

Can you avoid IRS audit red flags?  Yes and no.  Keeping your tax reporting consistent year over year will help.  We believe that large increases or decreases in income may affect your DIFF score.  Now, this hardly means you did anything “wrong”.  It simply identifies your return as one which may merit more attention.  Income that attracts attention is better than less that goes unnoticed.  Your industry also may affect whether the IRS selects your return for audit.  At present, real estate professionals (adding insult to injury perhaps) are being targeted for audit by the IRS.

You can get IRS tax help.  An important thing to remember is you have the right to be represented if your return is selected for audit, and you should.  There are both strategic and practical nuances to the audit process.  There is, as they say, a time and season for different approaches.  Sometimes cooperation is in order, sometimes it’s necessary to fight back.  A lot depends on the issue and the auditor.

Contact me for an overview of the tax audit process and what you might expect if your return is selected for audit.

Substantiating Aircraft Business Use

On audit an examiner will consider the degree to which you have documented your business use. This will include not only your flight logs but receipts, meeting records, and other evidence of the business purpose for the plane. Duration also plays a part, especially for “mixed purpose” trips to pleasant destinations. The “predominant” purpose for a trip must be for business, that is, at least the majority of the majority of the days must have been spent on business activities, documented as such. For example, your trip to Telluride might have both business and personal pleasure aspects (it should). Just be sure that you can articulate the business aspects of this trip.