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American Payroll Association (APA) Basic Guide to Payroll, 2013 Edition
It's more important than ever to be in compliance with payroll laws and regulations! How do you stay in compliance and avoid penalties? The APA Basic Guide to Payroll is written to make understanding the laws and regulations as easy as possible. And this single-volume guide is filled with tools to help you apply the law and make proper calculations – with ease!
The IRS has issued final regulations under Code Sec. 274, relating to the use of business aircraft for entertainment. These final regulations apply to tax years beginning after July 31, 2012, to taxpayers that deduct expenses for entertainment, amusement or recreation provided to specified individuals. Proposed regulations were initially released in June 2007; the proposed regulations (NPRM REG-147171-05) were adopted as amended after consideration of the comments received.
The final regulations did not adopt a suggestion made by commentators that final regulations should limit expenses subject to disallowance to the direct or variable costs of a flight and exclude fixed costs. The final regulations did not adopt this suggestion because Code Sec. 274(e)(2) does not differentiate between fixed and variable expenses, and the interpretation is contrary to congressional intent.
Rules on a charter rate safe harbor were not included in the final regulations due to the difficulty of determining accurate and reliable charter rates. However, the IRS is allowed to adopt charter rates or other safe harbors in the future.
Examples are provided in the final regulations illustrating the ways in which taxpayers can determine depreciation and basis under an election to compute depreciation expenses on a straight-line basis for all of a taxpayer’s aircraft and all tax years for calculation of the expenses subject to disallowance, even if the taxpayer uses another method to compute depreciation for other purposes.
In response to a comment, the final regulations clarify that interest is subject to disallowance if the underlying debt is secured by or properly allocable to an aircraft used for entertainment.
The aircraft aggregation rules were retained by the final regulations. The rules are sufficiently broad and flexible to permit taxpayers to apply them, since aggregating the expenses of all aircraft regardless of cost characteristics would create unacceptable distortions in the amount of expenses allocated to the use of each aircraft.
The final regulations did not adopt a primary purpose test for allocating the costs associated with the use of an aircraft to provide entertainment to specified individuals. Code Sec. 274(e)(2) applies if a taxpayer provides entertainment, amusement or recreation to a specified individual, and it does not depend on either the reason the taxpayer provides the entertainment or the overall use of the aircraft.
The final regulations retain the occupied seat hours or miles and flight-by-flight allocation rules. Additional examples of entertainment use were not included because entertainment use is already defined by Reg. §1.274-2(b)(1), and it is beyond the scope of this regulation.
A commentator had requested clarification of how an amount treated as compensation to or reimbursed by a specified individual is allocated to disallowed expenses in order to determine the amount of disallowed expenses that represent depreciation in order to adjust an aircraft’s basis. The final regulations clarify that any amounts disallowed and any amounts reimbursed or treated as compensation are applied to the total expenses subject to disallowance on a pro rata basis.
The proposed regulations did not exempt expenses for entertainment travel from disallowance under Code Sec. 274 when there is a business need to use the aircraft to provide security pursuant to Reg. §1.132- (m), which reduces the amount of income exclusion for the fringe benefits under circumstances where a bona fide security concern exists, but does not convert an entertainment flight into a business flight.
The final regulations interpret Code Sec. 274(e)(2) to provide exceptions to the disallowance provisions of Code Sec. 274(a). The final regulations do not include rules on the use of aircraft as entertainment facilities, the rules of which are addressed in the statute.
Examples were included illustrating the computation of expenses for a deadhead flight based on a comment requesting a way to compute expenses for flights without passengers en route to pick up or having discharged passengers (deadhead flights).
The proposed regulations provided that expenses allocable to a lease or charter of an aircraft to an unrelated third party in a bona-fide business transaction for the charter period are not subject to the expense disallowance. The final regulations changed the term charter period to the term lease or charter period, and they also clarified whether a third party is unrelated to the taxpayer as determined under Code Sec. 267(b) or Code Sec. 707(b).
A special rule for specified individuals on regularly scheduled flights that are commercial passenger airlines was provided by the final regulations. It treats expenses of entertainment flights by specified individuals in the same manner as expenses of entertainment flights by nonspecified individuals under certain circumstances.
Charitable contribution deductions for fixed costs of using aircraft for charitable purposes were not included in the final regulations as the rules were outside of the scope of the regulations.
Examples were retained from the proposed regulations that illustrate the amount of expenses disallowed when amounts are treated as compensation or when an employee reimburses the taxpayer. The circumstances under which the taxpayer has income from reimbursements is beyond the scope of the regulations. Notice 2005-45, 2005-1 CB 1228, is obsolete as of July 31, 2012. (T.D. 9597, 77 FR 45480, August 1, 2012.)
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