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In IR-2024-46, the IRS announced it will begin audits on the use of business aircraft by high-income taxpayers and the allocation between business and personal use of those aircraft. The IRS plans to use advanced analytics and funding from the Inflation Reduction Act to conduct the audits.

These audits are part of the IRS Large Business and International division's "campaign" program, which covers areas that have a high non-compliance risk. Depending on the results of these audits, the IRS indicated audits on "aircraft usage could increase in the future."

Additionally, the IRS announced that it remains focused on improving tax compliance in high-dollar areas and is using artificial intelligence to ramp up audits on some of the largest partnerships and corporations.

Implications

Upon an IRS examination, an auditor will likely request flight logs and supporting documentation to evaluate the reasonableness of the business tax deductions claimed by the taxpayer under IRC Sections 274, 280F, and 61. The burden of proof to substantiate business use is on the taxpayer, so an auditor may begin the assessment under the assumption that all usage of the aircraft was for nondeductible entertainment purposes unless compelling support proves otherwise.

Keeping contemporaneous records of business usage to support a potential audit may minimize conflicts that may arise. Having complete and accurate schedules that record relevant flight log data — such as hours, statute miles, passenger classifications — and the calculations to support the business usage may provide credibility to the deductions that the taxpayer claimed in the tax year under audit. Taxpayers also should consider retaining calendars, meeting notes, brochures, pamphlets from speaking engagements, and the like, along with a schedule of the annual tax calculations. Trying to prove business usage after-the-fact, sometimes months or years later, to support an audit will lower taxpayers' credibility of the aircraft's business usage. Subsequently prepared evidence and statements generally lack accuracy and recalling facts later is much more difficult, which the IRS will look at unfavorably, unless corroborative evidence is purported that shows a high degree of probative value to the auditor.

In addition, matters may arise in an audit on federal excise tax (FET). Certain reimbursements paid to business aircraft operators may be subject to FET and there may be instances in which FET may not have been collected and remitted on behalf of the taxpayer under audit, which could trigger further examination by an auditor.

Companies that have followed the Tax Code and regulations, retained the requisite support, and performed accurate calculations with proper classifications of each passenger's purpose should have minimal concern.

In light of the recent IRS announcement, taxpayers should:

• Maintain accurate flight logs with the data required in the Tax Code and regulations and adequate records to support the deductible business use, personal non-entertainment use, and certain commuting use calculated from the flight logs
• Properly classify each passenger's purpose on every leg of a flight in one of five categories (business non-entertainment, business entertainment, personal non-entertainment, personal entertainment, or commuting)
• Calculate annually the disallowed deduction for entertainment use of the plane based on the flight logs and classifications
• Calculate annually the imputed income to the appropriate passenger using an IRS-permitted method
• Calculate the ability to use bonus or accelerated depreciation in the year the aircraft was placed in service and for each subsequent year of the airplane's tax life to determine the recapture of depreciation should there be insufficient qualified business use
• Properly treat any reimbursements received and collect and remit FET, when applicable