IRS Issues Final Rule on Entertainment Use of Aircraft

 - July 31, 2012, 5:02 PM

After five years in proposed form, the IRS issued its final rule today disallowing tax deductions for “entertainment” (non-business) use of business aircraft. The rules apply whether the company owns, leases or charters the aircraft. Expenses subject to disallowance include variable costs (such as fuel and landing fees) and fixed costs (such as depreciation, hangar fees and pilot salaries).

The regulations have been in the works for eight years–since the American Jobs Creation Act of 2004 mandated the changes for non-business use of aircraft–and are a more formal and long-term answer to the IRS’s previously issued Notice 2005-45. After an initial review of the final rule, NBAA senior manager for financial tax policy Scott O’Brien told AIN that the codified changes appear to be little changed from the 2005 notice, meaning “what people are doing now for entertainment flights should not need to be changed.”

O’Brien lamented that the roughly 15 pages of comments that NBAA provided in September 2007 to the IRS about the proposed rule were largely “set aside.” He also complained that the calculations for disallowances are quite complicated and burdensome for operators.

However, the IRS is still considering one NBAA-provided suggestion for a charter rate “safe harbor,” which could make it easier to calculate disallowances. NBAA is analyzing the final rule and will provide more details soon, O’Brien said.