Taxation of Personal Use of Corporate Aircraft: Should income Equal the Deduction?
Sep 21, 2007 - Business growth and ease of mobility have played a significant role in the increasing use of corporate aircraft through the 21st century. Along with the increased use of corporate aircraft, personal use of corporate aircraft has also been on the rise. With this increased use, the tax treatment of the personal use of corporate aircraft has become much more visible and controversial. Karen C. Miller, Union University Accounting Professor, tracks the changes in the law and focuses on the tax policy issues related to the equity in the reporting of income by the employee and the deduction claimed by the corporation in her new work published in the September 2007 edition of ATA Journal of Legal Tax Research. Her work addresses the three-fold problem related to the current inequities of the current and proposed laws: What amount should be included as compensation by the employee as a fringe benefit for the personal use of company-owned aircraft? How much should the employer deduct for the operating cost of the aircraft for personal use? Should these amounts, compensation and deduction, be equal? In addition, Professor Miller assesses the horizontal inequities imposed by the current laws upon shareholders, different types of employees, corporations, and private citizens.
The current tax treatment of personal use of corporate aircraft violates the concept of horizontal equity, which provides that taxpayers in similar circumstances should be taxed equally. Private citizens pay tax on all of the income used to purchase personal flights. This situation is inconsistent with the preferential tax treatment afforded executives who use the company aircraft for personal purposes because the executive pays taxes on only a small portion of the actual cost of the flight. Since the executive does not pay tax on the actual cost of the personal use of the company aircraft, there is no incentive for the executive to limit his or her use. This exacerbates the tax inequity.
The AJCA of 2004 limits a company’s deduction for executive use of the business aircraft to the amount of income reported by the executive, which is usually substantially less than the actual cost. Therefore, the corporation’s shareholders are not only subsidizing the cost of the personal flight, the company is incurring non-deductible expenditures and may not deduct the actual costs of those flights. The current law regarding the personal use of business aircraft by company executives does not reflect the financial reality of this personal use and puts shareholders at a distinct financial disadvantage. Recent proposed law changes would protect corporate shareholders, requiring employees using company aircraft for personal purposes to report as income the actual costs of operating the aircraft for the personal flight. At a minimum, these proposed changes would restore the economic reality of the transaction, requiring the employee receiving the personal use to report the actual cost of that personal use and allowing the corporation a full deduction for the related operating costs.
For more information, contact Karen C. Miller at 731-661-5056 or kcmiller@uu.edu.
MCAFEE SCHOOL OF BUSINESS ADMINISTRATION
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