DEFENDING YOUR AIRCRAFT DEDUCTIONS BEFORE THE IRS | Aviation Tax and Aircraft Sales Tax


The Internal Revenue Service has developed a specialized examination procedure for aircraft owners. Although income tax examinations by the Internal Revenue Service are adjusted as needed, you should anticipate a review of the following items:
1. Is your aircraft undertaking a trade or business, or a non-deductible hobby?
2. Do you have an “honest expectation of economic profit”?
3. Do you have a business plan, and was it written before you were notified that you were being examined by the Service?
4. Have you made an election to group the aircraft undertaking with another trade or business undertaking for purposes of complying with the “hobby loss” rules?
5. Do you materially participate in this activity, and have you kept contemporaneous documentation of your time devoted to the undertaking?
6. Have you made an election to group your aircraft undertaking with your other business undertakings for purposes of the “passive activity” classification?
7. How have you documented personal use, and what adjustments have been made as a result of the use?
8. Have you kept a contemporaneous record of the business purpose of each passenger on the aircraft?
9. Have all charges for transportation services, including reimbursements from shareholders and related parties, been subjected to federal excise taxes and the related tax remitted?
10. Are the expenses incurred ordinary, necessary, and reasonable in amount?
The first avenue of attack by the Service will generally be an attempt to reclassify the aircraft undertaking as a nondeductible hobby. Regulations promulgated by the Service outline nine non-exclusive factors designed to reflect the taxpayer’s intent. These include: the manner in which the taxpayer carries on the activity; the expertise of the taxpayer or his advisors; the time and activity expended by the taxpayer in carrying on the activity; the expectation that the assets used in the activity may appreciate in value; the success of the taxpayer in carrying on other similar or dissimilar activities; the taxpayer’s history of income or loss with respect to the activity; the amount of occasional profits, if any; the financial status of the taxpayer; and the involvement of elements of personal pleasure or recreation. Although these factors generally are self-explanatory, the Service is primarily concerned on whether or not you treat this activity like a business. Do you have separate books and records, separate budgets, have you made adjustments to make the activity profitable, and are you actively involved?
The second issue,...


It ain't as simple as Tiger makes it look.