irs issue spotting and record keeping · 6/26/2012 · 6/26/2012 4 aircraft audit issues 1....
TRANSCRIPT
6/26/2012
1
IRS Issue Spotting and
Record Keeping Jed Wolcott, CPA
Sue Folkringa, CPA
Wolcott & Associates, PA
NBAA Live Webinar | June 26, 2012
6/26/2012
2
2
Are you a Certified Aviation Manager or
interested in earning points towards your initial application?
Today’s Webinar is eligible for Certified Aviation Manager (CAM)
Initial and Recertification points.
To qualify for credit you must respond to all poll questions.
Live NBAA Webinar| June 26, 2012
6/26/2012
3
Presenters
Sue Folkringa, CPA
Wolcott & Associates, PA
954.763.9363
Jed R. Wolcott, CPA
Wolcott & Associates, PA
954.763.9363
www.aviation-cpa.com
3
Live NBAA Webinar| June 26, 2012
6/26/2012
4
Aircraft Audit Issues
1. Passive Loss Limitations IRC §469
2. Ordinary and Necessary Use IRC §§162, 212
3. Depreciation Issues IRC §§168,167, 280F
4. Hobby Losses IRC §183
5. Personal Use of Company Aircraft IRC §274
6. Flight Department Company & FET IRC §§4261, 4262
7. Audits, Appeals, and Tax Court
8. Documentation required to support
aircraft business use deductions IRC §274(d)(4)
NBAA Live Webinar | June 26, 2012
6/26/2012
5
Creates Increases
Passive Limitations
Ordinary & Necessary
Depreciation
Hobby Losses
Personal Use
Flight Department Co.
Tax Ownership Structure Issues
Owner
Operating Company
135 Charter
Operator
NBAA Live Webinar | June 26, 2012
6/26/2012
6
Poll slide #1
Passive income could result from:
a rental activity, such as renting or leasing your aircraft
inadequate participation in the activity by the owner
can only be offset by passive income
all of the above
6/26/2012
7
Aircraft Audit Issues
Limits on deductions from leasing and activities
where there is insufficient participation by the owner
Passive Loss Limitations
IRC § 469
NBAA Live Webinar | June 26, 2012
6/26/2012
8
Passive Loss Limitations
(PAL) IRC §469
• IRS limits use of losses from:
• Rental activities
• Inadequate participation of owner
• Causes:
• Lease to 135, rental company
• Dry leases
• Aircraft owner does not participate in activity
• PAL activity can be internal or external
• Result: Passive losses can only be used to offset passive income and often can not be used by taxpayer
NBAA Live Webinar | June 26, 2012
6/26/2012
9
Internal and External Passive Activities
Owner
Operating Company
135 Charter
Operator
Dry Lease Dry Lease
Passive - Internal Passive - External
NBAA Live Webinar | June 26, 2012
6/26/2012
10
PAL Income
• PAL Income includes:
• Rental income
• Income from activities where owner does not have material
participation
• Gain on sale of property used in a passive activity
• Passive income generator (PIG)
• PAL Income does NOT include:
• Operating company income
• Portfolio income (interest, dividends, annuities)
• Income from working interests in oil and gas
• Royalties from self-created intangibles
NBAA Live Webinar | June 26, 2012
6/26/2012
11
PAL Rules, Exceptions,
and Grouping
• There are 6 exceptions to the PAL leasing rules. Treas. Reg. §
1.469-1T(e)(3)(ii)(A)-(F)
• There are 7 “tests” in the PAL material participation rules. Treas.
Reg. §1.469-5T(a)(1)-(7)
• PAL grouping rules provide a defense to the material participation
rules. Treas. Allows time spent in other managing other entities to
count toward the aircraft-owning entity. Reg. § 1.469-4
• Note, as of January 25, 2010, grouping election must be in
writing, filed with each tax return in the group
NBAA Live Webinar | June 26, 2012
6/26/2012
12
Tax Ownership Structure Issues
Owner
Operating Company
135 Charter
Operator
Dry Lease Dry Lease
Economic Entity – Allows
grouping to overcome material
participation concern
NBAA Live Webinar | June 26, 2012
6/26/2012
13
What to do Before the Audit
• Separate active and passive activities to limit passive effects
• Amend returns to include grouping election, restatement of
activities
• Restructure assignment of duties, prepare time logs
• Look for passive income opportunities
• Rental real estate
• Passive income generators (PIG)
• Document taxpayer’s intentions with leases and in corporate
minute books with annual meetings
NBAA Live Webinar | June 26, 2012
6/26/2012
14
Aircraft Audit Issues
IRS rules and regulations that
determine when and if use of an
aircraft is appropriate and deductible
Ordinary and Necessary IRC §§ 162, 212
NBAA Live Webinar | June 26, 2012
6/26/2012
15
Ordinary and Necessary Business Expense - IRC §162
• The IRS ordinary and necessary business expense standard requires that an expense be:
• Appropriate
• Helpful in carrying on the taxpayer’s business
• A common and accepted practice
• Reasonable in amount
• Incidental to the business
• Not “lavish” or “exorbitant”
I.R.C. § 162(a)(2):
NBAA Live Webinar | June 26, 2012
6/26/2012
16
Ordinary and Necessary Business Expense - IRC §162
• Aircraft must be ordinary and necessary to the normal course of
business
• Three hurdles must be overcome:
• Air transportation is a business requirement
• Air transportation need may only be met by private aircraft
• The aircraft is appropriate
for the company’s use
NBAA Live Webinar | June 26, 2012
6/26/2012
17
Ordinary and Necessary Business Expense - IRC §162
• IRS may try to limit deduction because aircraft was inappropriate for
specific travel requirement
• Could limit deduction to first class airfare equivalent
• May substitute reduced hourly operating rate
NBAA Live Webinar | June 26, 2012
6/26/2012
18
What to do Before the Audit
• Analyze company need for private air transportation
• Consider trading if current aircraft is inappropriate for company’s use
• Document business use with corporate minutes approving purchase
and explaining business purpose. Prepare business plan and adopt
in minutes
• Maintain logs tracking business use, non-business use, training
NBAA Live Webinar | June 26, 2012
6/26/2012
19
Aircraft Audit Issues
Rules for when and how much depreciation
can be deducted
Depreciation Issues
IRC §§168, 167, 280F
NBAA Live Webinar | June 26, 2012
6/26/2012
20
Poll Slide #2
True or False:
Generally, for depreciation purposes, Part 91 aircraft are depreciated
over 5 years and Part 135 aircraft are depreciated over 7 years.
NBAA Live Webinar | June 26, 2012
6/26/2012
21
Depreciation Audit Issues:
• Non-compliance with Listed Property rules
• Incorrect application of depreciation rates
• Failure to follow 1031 tax free exchange regulations
• Failure to follow bonus depreciation rules
• If there is leasing to +5% owner(s), business use by other
employees must exceed 25% to qualify for MACRS and
bonus depreciation
NBAA Live Webinar | June 26, 2012
6/26/2012
22
Tax Ownership Structure Issues
Owner
Operating Company
135 Charter
Operator
Dry Lease Dry Lease
When there is leasing activity
to a +5% owner, business use
by non-5% owner-employees
must exceed 25% to qualify
for accelerated and bonus
depreciation.
NBAA Live Webinar | June 26, 2012
6/26/2012
23
Depreciation Rates for Aircraft
• Only two tax depreciation methods available for business aircraft:
• +50% business use - taxpayer may use optional Modified
Accelerated Cost Recovery System (MACRS)
• -50% business use - taxpayer must use Alternative Depreciation
system (ADS)
NBAA Live Webinar | June 26, 2012
6/26/2012
24
Depreciation Rates for Aircraft –
MACRS
• Modified Accelerated Cost Recovery System (MACRS)
• 5 Year rate for Part-91 aircraft
• 7 Year rate for Part-135 aircraft
• Depreciation rate must reflect predominant use each
year if use is split between Part-91 andPart-135
• BIG GOTCHA: If MACRS is adopted and business use falls
below 50% taxpayer must recapture previous year’s excess
depreciation
NBAA Live Webinar | June 26, 2012
6/26/2012
25
Depreciation Rates for Aircraft –
ADS
• Alternative Depreciation System (ADS) Straight Line Depreciation
• 6 Year rate for Part-91 aircraft
• 12 Year rate for Part-135 aircraft
• Once straight line depreciation is elected, taxpayer cannot change
NBAA Live Webinar | June 26, 2012
6/26/2012
26
Bonus Depreciation Issues
• Typical bonus depreciation audit issues:
• Not meeting contract requirements
• Not meeting deposit requirements
• Incorrect application of 1st year business-use requirements
• Purchasing existing contracts
• Failure to meet +50% business use in all subsequent years
• If you claim bonus depreciation, EXPECT TO BE AUDITED
NBAA Live Webinar | June 26, 2012
6/26/2012
27
Poll slide #3
Does the use of the aircraft in the acquisition year have a bearing on
the amount which could be deducted for bonus depreciation?
Yes/No
6/26/2012
28
1031 Tax-Free Exchange
Regulations IRC §1031
• Rules for “Forward” and “Reverse” exchanges are complex
• Planning must take place prior to signing any documents;
1031’s transactions cannot be done “after the fact”
• Completing the transactions within the specified deadlines is crucial
• Failure to meet stat deadlines will cause gain on the relinquished
aircraft to be recognized in the year of sale
• Suggestion: Use exchange company
NBAA Live Webinar | June 26, 2012
6/26/2012
29
Single-Purpose Companies
Have High Audit Exposure
• SPC’s are companies formed to only own an aircraft
• Often used to shelter from potential liability, lease aircraft back to
owner
• Typically S-Corps and multi-member LLC’s
• Cash in equals cash out
• Depreciation expense remains, very prominent
• Very high audit selection rate
NBAA Live Webinar | June 26, 2012
6/26/2012
30
What to do Before the Audit
• Consider restructuring SPC
ownership to limit audit exposure
• Review 91 vs. 135 use to see if rate is
appropriate;
• if bonus or accelerated depreciation is
claimed, be sure that business use
exceeds 50%
• If leasing, review use by 5% owners;
amend if necessary
• Consider the “visibility” of bonus
depreciation; be sure documentation
is adequate
NBAA Live Webinar | June 26, 2012
6/26/2012
31
Aircraft Audit Issues
IRS rules for companies considered
not in business to make a profit
Hobby Losses IRC §183
NBAA Live Webinar | June 26, 2012
6/26/2012
32
Poll Slide #4
The IRS presumes an activity is not a hobby if income is earned in
1 of 10 years
2 of 3 years
3 of 5 years
Aircraft are never considered to be hobbies
NBAA Live Webinar | June 26, 2012
6/26/2012
33
Hobby Loss Rules – IRC §183
• Restricts use of losses against other taxable income if activity is not
“for profit”
• IRS presumes activity is not a hobby if company has profits in 3 out
of 5 years
• If not 3 profitable years, IRS applies facts and circumstances test
• Hobby Loss Rules are dangerous because they allow IRS to
disallow all operating costs, ownership costs, and depreciation.
Can be big win for IRS
NBAA Live Webinar | June 26, 2012
6/26/2012
34
Hobby Loss Rules
• IRS often cites Hobby Loss rules when aircraft is owned by a
single-purpose company (SPC)
• Includes S-corps, multi-member LLC’s, and Schedule C’s
for individually-owned aircraft
• Cash in often equals cash out, meaning no profit from day-
to-day operations
• SPC’s often have consistent loss years due to depreciation
NBAA Live Webinar | June 26, 2012
6/26/2012
35
Single Purpose Companies –
Audit Targets
Owner
Operating Company
135 Charter
Operator
Example of Single-Purpose Company
SPC
Reports Losses
Files Tax Return
NBAA Live Webinar | June 26, 2012
6/26/2012
36
Hobby Loss Rules
Treas. Reg. §1.183-2(b)
IRS regulations provide a list of nine factors to test if an activity is
for profit, such as
1. Manner in which taxpayer carries on the activity
2. Expertise of the taxpayer or advisors
3. Time and effort expended
4. Expectation of future profits
5. Expectation that assets will appreciate in value
IRS also permits grouping of “hobby” activity with other profitable
activity Treas. Reg. § 1.469-4(d)
NBAA Live Webinar | June 26, 2012
6/26/2012
37
What to do Before the Audit
• Change ownership structure to place aircraft in a profitable operating company, or
• In analyzing profitability, depreciation can be ignored
• Change ownership to make company a disregarded SM-LLC
• Amend returns to include grouping election
• Create business plan, record
• in Corporate Minute Book
• Document, document, document
NBAA Live Webinar | June 26, 2012
6/26/2012
38
Aircraft Audit Issues
Rules for reporting the non-business use of company
aircraft
Personal Use of Company Aircraft
IRC § 274, Reg. § 1.61-21
NBAA Live Webinar | June 26, 2012
6/26/2012
39
Personal Use of
Company Aircraft
• For aircraft owned by a Corporation, S-Corp or Partnership and
provided with pilot(s):
• Employees must report SIFL1 taxable income for non-business
flights
• Separate rates for “control” and “non-control” employees
• Cash reimbursements may satisfy this requirement
• Company must apply cost limitation rules for entertainment
flights by “specified individuals” and guests
1Standard Industry Fare Level rates published by DOT
NBAA Live Webinar | June 26 , 2012
6/26/2012
40
Personal Use of
Company Aircraft
• For individual-owned aircraft, including aircraft in a single-member
LLC owned by an individual:
• Apply primary purpose test, similar to how individual-owned
autos are reported
• Deduct pro-rata portion of direct costs, ownership costs and
depreciation for non-business flight use
• No distinction between non-business and entertainment
flights; use is either business or non-business
NBAA Live Webinar | June 26, 2012
6/26/2012
41
Personal Use Of Company
Aircraft – Defenses (continued)
• Entertainment Cost Limitations
• No “safe harbor” rules
• Follow Notice 2005-45
• Follow proposed Reg. 1.274-10
• No cases yet (legislation is too recent)
NBAA Live Webinar | June 26, 2012
6/26/2012
42
What to do Before the Audit
• Personal Use of Company Aircraft:
• If SIFL has been overlooked, amend employee personal
tax returns to include SIFL
• If entertainment disallowance has been overlooked,
amend company returns to recognize the entertainment
cost disallowance rules for aircraft-owning entity
• Amend returns for unapplied non-business use deduction
for individually-owned and flown aircraft
• Document business flights; make sure flight logs support
business and non-business use
NBAA Live Webinar | June 26, 2012
6/26/2012
43
Aircraft Audit Issues
Flight Department Company
IRC §§4261, 4262
NBAA Live Webinar | June 26, 2012
6/26/2012
44
Flight Department
Company Issue – IRC § 4261
• Entity only owns and operates the aircraft
• Pays DOC’s including pilots
• Only purpose is to provide air transportation
• Commercial says IRS!!!! – Excise tax owed:
• 7.5% of all costs, plus
• $3.80 per passenger (2012)
• 6.25% for freight
• See Notice 2005-62 for IRS examples
NBAA Live Webinar | June 26, 2012
6/26/2012
45
Typical Flight Department
Company Structure
Owner
Operating Company
Wet Lease
Pilot (paid by aircraft
company)
IRS says: “You are
providing air transportation services. FET
applies”
Owner says: “I’m simply
providing my company with an aircraft”
NBAA Live Webinar | June 26, 2012
6/26/2012
46
Flight Depart. Co. –
How to Restructure – Pros and Cons
• Convert “wet lease” to “dry lease”
• Create separate management company to employ pilots?
• OK, providing the lessee pays the pilots
• Note potential problem: This strategy could convert activity to passive
• Key issue – who controls the pilot?
• Caution: It is too late to restructure after the audit has commenced
NBAA Live Webinar | June 26, 2012
6/26/2012
47
Affiliated Group Exemption
as a Flight Dept. Company Audit Defense
– IRC 4282
• Allows large company with many subsidiaries to form an “aircraft operations” entity to operate the company aircraft without incurring FET liability
• Must be a common parent owning at least 80% of each includable subsidiary
• Certain entities are not includable, including S-corporations (IRC Sec. 1504)
• Exemption does not apply to flights provided to third parties outside of the affiliated group
NBAA Live Webinar | June 26, 2012
6/26/2012
48
Poll slide #5
If an operating company owns an aircraft, pays the pilots and
provides transportation to its employees, will there be an FET
liability?
Yes or No
6/26/2012
49
What to do Before the Audit
• Convert wet leases to dry leases (can be as simple as
changing which checkbook is used)
• Have written leases making clear who pays the pilots
• Hire a management company to provide pilots
• A company may create their own crew management
company; it only has to be an entity separate from the
aircraft-owning company
• If claiming affiliated group exemption, be sure all
entities using the aircraft qualify
NBAA Live Webinar | June 26, 2012
6/26/2012
51
IRS Audits: A Three-Step Process
Audit (sometimes called the field audit).
Auditor is on-site examining book and records
Should be handled by qualified company personnel
Best done away from the company offices
IRS Appeals.
Conducted by specially-trained senior IRS agents
Requires written protest listing all the taxpayer arguments
U.S. Tax Court
Requires qualified representation
Each step progressively takes longer, and is more costly to defend
NBAA Live Webinar | June 26, 2012
6/26/2012
52
Every Issue Won at Field Audit
Level is a Victory!
• Consider the field auditor the “Traffic Cop”
• Easier to argue a ticket on the street than in Traffic Court
• Any issue eliminated at the audit level is gone
THE FIELD EXAMINATION IS THE MOST
CRUCIAL PORTION OF THE AUDIT
NBAA Live Webinar | June 26, 2012
6/26/2012
53
During the Field Audit:
EVERYTHING IS NEGOTIABLE
If you can’t settle the case at the audit level, then someone is being unreasonable
NBAA Live Webinar | June 26, 2012
6/26/2012
54
Supervisor Negotiations
• Negotiations become more difficult as the audit progresses
• Taxpayer can always request a supervisor meeting
• Supervisor is obligated to attend final meeting if taxpayer
requests
• Strategy: Probably nothing to lose to demand meeting
• Make auditor and supervisor aware by your actions that you are
prepared to take the case to court if a settlement can’t be reached
at Appeals
• Always request that supervisor abate penalties
NBAA Live Webinar | June 26, 2012
6/26/2012
55
30-Day Letter
• Notifies taxpayer of right to appeal to proposed adjustments within
30 days
• Package will include a copy of auditor’s examination report and
Notice of Proposed Adjustments
• For individual - Form 4549-E and Letter 3605-A
• For corporation or partnership - Letter 1085
• If Taxpayer intends to take case to Appeals, IRS rules permit 30
days to file Protest Letter
• Note that the 30-day period is strictly enforced
NBAA Live Webinar | June 26, 2012
6/26/2012
56
90-Day Letter
• If taxpayer does not respond to 30-day letter, IRS sends 90-day
letter
• Also known as Statutory Notice of Deficiency
• Gives taxpayer 90 days (150 days if out of country) to file a petition
with Tax Court
• If taxpayer still does not respond, the case is closed, and the Notice
of Deficiency is sent to Collections
Note that the 90-day period is strictly enforced
NBAA Live Webinar | June 26, 2012
6/26/2012
57
Documentation
IRS Regulations for Documenting the Use of
Business Aircraft IRC § 274(d)(4)
Documentation to keep in the event of an audit.
NBAA Live Webinar | June 26, 2012
6/26/2012
58
Cost Example: Mid-Level Turbine Aircraft
• $10 million aircraft value, 200 flight hours per year: Total DOC,
ownership costs, and depreciation first year = $3,000,000
Business 80% Entertainment 20% $0 $3,000,000
$2,400,000 Business
@34% = $816,000 Income Tax $600,000
Entertainment
These are the flights that need to be documented!
NBAA Live Webinar | June 26, 2012
6/26/2012
59
Information Document Request
SAIN # 512-600
1. Did the company provide air transportation to or
for employees other than regularly scheduled
commercial carriers during calendar year?
2. If the company provided employees air
transportation utilizing “Business Aircraft,” then
please:
a. Describe the circumstances and employees
involved. For example, was the aircraft
chartered or leased, provide a copy of the
contract/agreement.
59 NBAA Live Webinar | June 26, 2012
6/26/2012
60
Required Documentation
b. Provide a listing of each flight on Business
Aircraft showing:
i. Dates of travel
ii. Origin of flight
iii. Destination of flight
iv. Number of seats available on the aircraft
v. Name of each passenger, and
vi. Whether the passenger was traveling for
company business, personal, or personal
entertainment purposes
60 NBAA Live Webinar | June 26, 2012
6/26/2012
61
Required Documentation
c. If the passenger was traveling for company business
purposes, also provide:
i. Business relationship of each passenger to
taxpayer, and
ii. Business purpose for each passenger’s trip
d. If the passenger was traveling for personal purposes,
provide:
i. Whether the passenger was a ‘specified
individual”, guest or relative of a “specified
individual” under IRC 274(e)(2)(B)
ii. Whether the passenger was a ‘control employee,”
guest or relative of a “control employee” as defined
in 1.61-21(g)(8)
61 NBAA Live Webinar | June 26, 2012
6/26/2012
62
Required Documentation
3. Provide all computations made under IRC 274(e),
Notice 2005-45 or proposed regulations to the
amount deductible under IRC 274(e)(2) or (9) for
personal entertainment aircraft expenses incurred
for “specified individuals”. Information must
reflect:
a. Type of Aircraft expense (fuel, interest,
depreciation, flight crews, etc.) considered in
the IRC 274(e) calculation, and
b. Flight by Flight computations
62 NBAA Live Webinar | June 26, 2012
6/26/2012
63
Required Documentation
4. Provide detailed “Fair Market Value” or “Standard
Industry Fare Level (SIFL)” computation where the
taxpayer has calculated taxable compensation of
wages for Personal Use of Business Aircraft for
employees or independent contractors
63 NBAA Live Webinar | June 26, 2012
6/26/2012
64
Required Documentation
4. (Cont’d) Additionally, provide the related Form W-2
or Form 1099 along with a computation showing
how much of the compensation on the Form is
related to personal use of aircraft
64 NBAA Live Webinar | June 26, 2012
6/26/2012
65
Required Documentation
5. Provide copies of:
a. The maintenance logs for all company aircraft
b. The aircraft logs or pilot logs for the aircraft
utilized by the company
65 NBAA Live Webinar | June 26, 2012
6/26/2012
66
Typical Spreadsheet
31%
0.2237$ 0.1706$ 0.1640$ 300% 40.90$
Flt
# Leg Date From To Flight Type Hrs
Statute
Miles
Total
Pax
Business
Pax
Pers Non-
Ent Pax
Entertain
Pax
Exempt
Spouse &
Dependents
Non-
Control
Guests
0-500 Miles501-1500
Miles1500+ Miles Subtotal Factor Subtotal
Terminal
ChargeSubtotal
Imputed
Income Reimbursed
Entertain
Seat Miles
Total Seat
Miles
Entertain
Seat Hours
Total Seat
Hours
Entertain
Miles
Entertain
Hours
Flight 1: Business Flights
1 1 1/2/11 STL MDW Business 0.7 251 6 6 0.00 - - 1,506 4.2 - -
1 2 1/3/11 MDW STL Business 0.7 251 6 6 0.00 - - 1,506 4.2 - -
Flight 2: Entertainment Flights
2 1 1/10/11 STL ORL Entertainment 2.1 874 4 4 111.85 63.80 0.00 175.65 300% 526.96 40.90 567.86 2,271 - 3,496 3,496 8.4 8.4 874 2.10
2 2 1/20/11 ORL STL Entertainment 2.1 874 4 4 111.85 63.80 0.00 175.65 300% 526.96 40.90 567.86 2,271 2,520 3,496 3,496 8.4 8.4 874 2.10
Flight 3: Non-Entertainment Flights
3 1 2/1/11 STL AAO Other Business 0.9 378 2 2 84.56 0.00 0.00 84.56 300% 253.68 40.90 294.58 589 - - 756 1.8 - -
3 2 2/5/11 AAO STL Other Business 0.9 378 2 2 84.56 0.00 0.00 84.56 300% 253.68 40.90 294.58 589 - - 756 1.8 - -
Flight 4: Mixed Business & Entertainment Flights, Multi-Leg Flights, With Spouses
4 1 3/10/11 STL DET Mixed 1.2 461 4 2 2 103.13 0.00 0.00 103.13 300% 309.38 40.90 350.28 701 - 922 1,844 2.4 4.8 231 0.60
4 2 3/11/11 DET HPN Entertainment 1.4 488 4 4 109.17 0.00 0.00 109.17 300% 327.50 40.90 368.40 1,474 - 1,952 1,952 5.6 5.6 488 1.40
4 3a 3/14/11 HPN DET Entertainment 0.9 434 2 2 97.09 0.00 0.00 97.09 300% 291.26 40.90 332.16 664 - 868 868 1.8 1.8 434 0.90
4 3b 3/14/11 DET STL Business 1.2 461 2 2 0.00 - - 922 2.4 - -
4 3c 3/14/11 HPN STL Entertainment 2.1 895 2 2 111.85 67.39 0.00 179.24 300% 537.71 40.90 578.61 1,157 - 1,790 1,790 4.2 4.2 895 2.10
Leg 3 Adjustment (2.1) (895) (665) (1.50)
Flight 5: Mixed Business & Entertainment Flights; With Customers
5 1 4/5/11 STL FTG Business 1.8 761 4 4 0.00 - - 3,044 7.2 - -
5 2 4/8/11 FTG LAS Entertainment 1.4 631 6 6 111.85 22.35 0.00 134.20 300% 402.60 40.90 443.50 2,661 - 3,786 3,786 8.4 8.4 631 1.40
5 3 4/11/11 LAS FTG Entertainment 1.4 631 6 6 111.85 22.35 0.00 134.20 300% 402.60 40.90 443.50 2,661 - 3,786 3,786 8.4 8.4 631 1.40
5 4 4/11/11 FTG STL Business 1.7 761 4 4 0.00 - - 3,044 6.8 - -
Flight 6: Deadhead Leg on Multi-Leg Flight; 50% Seating Capacity Rule
6 1 4/18/11 STL PDK Mixed 1.0 476 8 4 4 3 1 106.48 106.48 31.3% 33.33 40.90 74.23 74 - 1,904 3,808 4.0 8.0 238 0.50
6 2 4/19/11 PDK HPN Deadhead 1.8 763 7 5 2 0.00 - 1,526 5,341 3.6 12.6 218 0.51
6 3 4/20/11 HPN STL Business 2.0 895 5 5 0.00 - - 4,475 10.0 - -
Flight 7: Foreign Travel
7 1 5/15/11 STL MBJ Mixed 3.6 1,585 6 3 3 111.85 170.60 13.94 296.39 300% 889.17 40.90 930.07 2,790 - 4,755 9,510 10.8 21.6 793 1.80
7 Foreign SIFL 1,116
7 2 5/25/11 MBJ STL Mixed 3.6 1,585 6 3 3 111.85 170.60 13.94 296.39 300% 889.17 40.90 930.07 2,790 - 4,755 9,510 10.8 21.6 793 1.80
7 Foreign SIFL 0.00 1,116 - - - - -
Summary: All Other Flights
Business 77.5 39,062 215 215 - 122,762 286.4 - -
107.9 52,000 305 259 4 42 22,926 2,520 33,036 187,958 76.8 438.6 6,434 15.11
84.92% 1.31% 13.77% 17.58% 17.51% 12.37% 14.01%
FLIGHT INFORMATION SIFL CALCULATION COST DISALLOWANCE
50% Seating Capacity
Flights Only Seat Method Flight-By-Flight Method
66 NBAA Live Webinar | June 26, 2012
6/26/2012
67
Typical Spreadsheet
What the typical spreadsheet often does not include:
a. Names of passengers
b. Relationship to taxpayer
i. Identifying control employees & guests
(aggregate only)
ii. Specified individuals & guests (aggregate)
c. Purpose of each passenger on the flight
d. Computations involving aircraft operating costs,
ownership costs, and depreciation
67 NBAA Live Webinar | June 26, 2012
6/26/2012
68
Basic Supporting Documentation to Keep
Flight logs
Passenger manifests
Narrative of purpose of each passenger on the flight
Description of each employee traveling on the aircraft
Relationship of each guest to the company
Explanation of business purpose of each flight
Accounting of the aircraft income and expenses
Workpapers linking aircraft books to amounts shown on the tax return
Documentation supporting amounts paid and deducted
68 NBAA Live Webinar | June 26, 2012
6/26/2012
69
DOCUMENTATION SPREADSHEET AVIATION SOFTWARE OTHER SOURCES
Date of Travel
Origin Airport
Destination Airport
Seats
Flight by Flight
Detail of SIFL
Passenger Names
Purpose of Flight
Relationship to Taxpayer
Business Purpose of Passenger
Identify Specified Individual
Identify Control Employee
SEC Incremental Cost Detail
Computation of Disallowance
Type of Expenses
W-2/1099 SIFL
Maintenance Logs
Pilot Logs
Documentation Sources
NBAA Live Webinar | June 26, 2012
6/26/2012
70
Documentation
IRS requires tax documentation be
contemporaneous
Document the business flights, because those are
the ones you want to keep
Spreadsheets typically used for tax returns;
insufficient for documenting business use
IRS agent will often disallow all flights, then add
back business flights one-by-one
Keep records for 5 years
70 NBAA Live Webinar | June 26, 2012
6/26/2012
71
Questions for Today’s Presenters?
Sue Folkringa, CPA
Wolcott & Associates, PA
954.763.9363
Jed R. Wolcott, CPA
Wolcott & Associates, PA
954.763.9363
www.aviation-cpa.com
71
Live NBAA Webinar| June 26, 2012