With business travel ramping up again, you might be dreaming of buying a corporate airplane to avoid layovers and crowded airplanes. Before you buy an airplane for your successful business, it’s important to be aware of the tax rules.
When Does It Make Sense to Consider Purchasing a Corporate Airplane?
Let’s review the most significant tax rules affecting corporate aircraft ownership. Many business owners are surprised by how favorable the rules are.
Corporate Airplane Tax Rules for Business Travel Only
In most cases, if your company buys a plane used only for business travel, the company can deduct its entire cost in the year that the plane is placed into service.
A corporately-owned airplane is ineligible for this immediate write-off in the following cases:
- The few instances in which neither the 100% bonus depreciation rules nor the “section 179” small business expensing rules apply, or
- When the taxpayer has elected out of 100% bonus depreciation and has not made the election to apply “section 179” small business expensing. In those cases the depreciation schedule is 20% of the cost for Year 1, 32% for Year 2, 19.2% in Year 3, 11.52% in Year 4, 11.52% in Year 5 and 5.76% in Year 6.
Note that the bonus depreciation rate will begin to be phased down for property placed in service after calendar year 2022.
Interestingly, the airplane “cost recovery” rules are more favorable than those for business vehicles. The business auto rules place annual caps on depreciation and in the year a vehicle is placed in service they cap both depreciation and “section 179” small business expensing.
In the case of a business-travel-only aircraft, post-acquisition expenditures are treated the same as post-acquisition expenditures for other machinery and equipment.
For example, expenses for routine maintenance and repairs are immediately deductible. However, amounts that improve or restore the aircraft (such as expenses paid to overhaul an engine) must be capitalized and depreciated.
The Catch: Record Keeping
The only “catch” that distinguishes the tax treatment of a company aircraft used 100% for business travel is the requirement for more rigorous record keeping. Unlike most other machinery and equipment, company planes are—by statute—one of the categories that need records to prove the connection of uses and expenditures for business purposes.
Corporate Airplane Tax Rules for Business AND Personal Travel
Personal travel will not affect corporate aircraft depreciation results if the value of the travel is compensation income (and is reported and withheld upon as such) to a person that is not a (1) 5% owner or (2) person “related” to the corporation.
Personal Travel for Non-Share-Holding Employee
For example, personal travel by a non-share-holding employee will not affect depreciation if the value of the travel is compensation to him or her and is reported and withheld upon as such.
The depreciation results can be affected if the person for whom the value of the travel is compensation income is a 5% shareholder or a related person. But even in that case, the depreciation results will not be affected if a generous “fail-safe” rule is complied with.
Personal Travel Limitations
With one limitation, personal travel will not affect the treatment of otherwise deductible post-acquisition expenditures if the value of the travel is compensation income (and is reported and withheld upon as such).
The limitation—when using the value of travel as compensation income—applies if the person is a 10% owner, director, officer, or a person “related” to the corporation. In that case, the amount of the deduction for otherwise deductible costs allocable to the personal travel cannot exceed the value of the travel.
An additional issue that can arise in the case of personal travel by a stockholder is whether the IRS can recharacterize as a dividend the value of travel treated as compensation. In this case, the value can be included in the shareholder’s income, but is not deductible to the company. However, that possibility arises only if the traveler-stockholder’s compensation, when increased by the value of the travel, can be deemed excessive.
The tax rules for owning a corporate aircraft, even when used for a mix of business and personal travel, are mostly straightforward. However, the tax rules require careful record keeping and, when an aircraft is used for personal travel, compliance with reporting and withholding requirements.
We’re available to discuss the tax consequences and non-tax implications of a corporate aircraft purchase, both financial and non-financial.
About Smith Patrick CPA
Smith Patrick CPA is a St. Louis-based, family-owned CPA firm dedicated to providing personal guidance on taxes, investment advising and financial services to small businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to businesses, non-profits, individuals and government agencies in St. Louis and the surrounding areas. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.