How Treasury and the IRS have the authority to eliminate a little-known tax subsidy for executives’ personal use of corporate jets
The IRS announced plans to expand audits on business aircraft involving personal use, focusing on large corporations, large partnerships and high-income taxpayers. One part of the story has received less attention: in addition to some executives potentially failing to report personal use of corporate jets as income at all, the regulations allow those who do report the income to dramatically understate the value of personal flights on their tax returns — sometimes 100x below market rate — in order to lower their tax bill.
“As the IRS focuses on private jets, it should revisit how it values personal use of corporate aircraft,” said Mike Kaercher, senior attorney advisor at the Tax Law Center. “The current rules allow these flights to be significantly undervalued, enabling wealthy filers to pay much less in taxes than fair market value would dictate, and it’s within the IRS’ authority to revise these rules.”
For background, regulations generally allow the income inclusion for personal use to be calculated (1) using the arm’s-length price for a charter flight or (2) based on the Standard Industry Fare Level (“SIFL”) method. The income inclusions under the SIFL method were supposed to provide a simpler and more administrable method for valuing the use of corporate jets — but the problem is that the valuations allowed under the SIFL method could be 100x below the market rate. The current SIFL rates range between 21 cents and 29 cents per mile, while a charter company that prices flights by distance offers rates between $13 and $29 per mile. This is not news to the business community and tax profession. As a large accounting firm notes, “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.”
Under current statutory authority, Treasury and the IRS can revise the rules to more accurately reflect income related to personal use of company aircraft. This can be done through several approaches, including 1) eliminating the use of SIFL rules entirely or 2) increasing the “aircraft multiples” listed in Treas. Reg. § 1.61–21(g)(7), and instituting processes to make sure that they are regularly reviewing and updating the simplified method so that it keeps track with market values of private jet flights. (Even under current rules, the SIFL method is not available to filers who are audited and found not to have paid owed taxes on their personal use of corporate jets. Instead, they are responsible for paying taxes on the full fair market value.)
A number of bills take broader approaches to address taxation of corporate aircraft. For example, businesses and individuals who own private jets can currently deduct the cost of the aircraft far more quickly than the plane actually loses value (depreciates) by allowing for accelerated cost recovery. A number of proposals would require straight-line depreciation, including the Jets for Vets Act of 2012, the American Jobs Act of 2011, and the Jobs! Jobs! Jobs! Act of 2015. Another policy option being considered includes changes to fuel excise taxes on private air travel, as under the Fueling Alternative Transportation with a Carbon Aviation Tax Act of 2023.
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