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On Wednesday the IRS announced plans to begin dozens of audits on business aircraft to determine whether, for tax purposes, the use of the jets was being properly allocated between business and personal reasons.
Using the Inflation Reduction Act funding and as part of ongoing efforts to improve tax compliance in high-income categories, the IRS is cracking down on private jet users. With advanced analytics and resources from the Inflation Reduction Act, the IRS will examine an area which it says has not been closely scrutinized during the past decade. The number of audits related to aircraft usage could increase in the future after the initial results and as the IRS hires additional examiners.
"During tax season, millions of people are doing the right thing by filing and paying their taxes, and they should have confidence that everyone is also following the law," IRS Commissioner Danny Werfel said. "Personal use of corporate jets and other aircraft by executives and others have tax implications, and it's a complex area where IRS work has been stretched thin. With expanded resources, IRS work in this area will take off. These aircraft audits will help ensure high-income groups aren't flying under the radar with their tax responsibilities."RELATED STORIES:House advances bipartisan bill that would restore 100% bonus depreciation through 2025Changes coming to aircraft bonus depreciation tax in 2023
The tax code passed by Congress allows for a business to deduct for the expenses of maintaining an asset, like a corporate jet, if the asset is being used for business purposes. The use of the aircraft must be allocated between business use and personal use and as this is a complex area of tax law, it can be difficult to track records. Bizjets are used for both business and personal reasons by officers, executives, other employees, shareholders and partners. When someone like an executive uses the company jet for personal travel, this impacts the eligibility for certain business deductions. Using the company jet for personal travel can result in income inclusion by the individual using the jet for personal travel, while also impacting the business's eligibility to deduct the costs related to personal travel.
This move is part of a larger effort by the IRS to ensure large corporate, large partnerships and high-income individual filers pay the taxes they owe. Before the Inflation Reduction Act, there were ten years of budget cuts which prevented the IRS from keeping up with the overly complicated set of tools the wealthy taxpayers will use to shelter or manipulate income to avoid taxes. The IRS said it was taking aggressive action to close the gap, working on corporate jets in addition to improving tax compliance in overlooked high-dollar areas where the IRS did not have the resources prior to Inflation Reduction Act funding.
According to The New York Times, the sale of corporate jets increased after 2017 tax legislation that enhanced a deduction known as bonus depreciation, which allowed for the deduction of the full cost of the plane in the first year of ownership.
"On a given taxpayer's tax return, the amount of the deduction for aircraft travel can be in the tens of millions of dollars," Werfel said to the NY Times. "That's why it's so important that we get this right, because the amount of the deduction, given the value of the asset, is so material."
The NBAA questioned the plan, stating that business aviation is critical to the U.S. economy, supporting 1.2 million jobs and contributing $250 billion to the GDP. The aircraft these companies use helps to improve efficiency, productivity, flexibility and competitiveness.
"Today's announcement by the IRS amounts to nothing more than an audit in search of a problem, and an attempt to broadly paint with a negative brush the thousands of U.S. companies of all sizes that rely on business aircraft to effectively compete in a global marketplace," NBAA President and CEO Ed Bolen said.
Companies using business aviation are expected to be compliant with tax laws and SEC rules. The use of company aircraft is often approved for non-business reasons and some businesses will mandate that certain employees travel on company planes under all circumstances out of safety and security concerns.
"It is difficult to understand why the agency is suggesting that these companies — some of the most respected, well-managed businesses in the world — are not in compliance with applicable tax laws," Bolen said. "For decades, studies have shown that companies utilizing business aircraft to successfully address some portion of their transportation challenges consistently outperform comparable companies without the asset."
A bill to provide tax relief, which includes an extension of the 100 percent bonus depreciation credit, has moved forward in Congress with bipartisan support. The IRS has not specified how much in additional taxes it could collect from the dozens of anticipated audits.
"The IRS continues to increase scrutiny on high-income taxpayers as we work to reverse the historic low audit rates and limited focus that the wealthiest individuals and organizations faced in the years that predated the Inflation Reduction Act," Werfel said. "We are adding staff and technology to ensure that the taxpayers with the highest income, including partnerships, large corporations and millionaires and billionaires, pay what is legally owed under federal law. The IRS will have more announcements to make in this important area."