Christopher Durst, Senior Tax Advisor
Stop me if you’ve said this before…
Or if you’ve heard another aircraft owner say this, “I don’t keep a business flight log for my aircraft business use, but I could go back and reconstruct one if I was ever audited.” I hear some version of that statement at least once or twice per week, and it never fails to make me cringe when I do. For those of you that have already had to endure a Federal audit where the IRS “examined” your aircraft use, you already understand the pain & suffering of just trying to convince the IRS agent that your aircraft business use is justified. Not to mention what you would have to endure if you didn’t have flight logs of your business use. The prospect of having large depreciation deductions disallowed and having to pay penalties and interest on those deductions has caused countless taxpayers many a sleepless night.
Aircraft Business Use Precedent
Walter Jack and Thomas Girardi, both attorneys with substantial aircraft business use, found out the hard way that the IRS doesn’t mess around anymore when it comes to aircraft flight logs and the Tax Court backed their position. In 2014 they found out that “the devil is in the details”, when the U.S. Tax Court decided that they were not entitled to many of the business deductions they had taken related to their ownership and operation of their aircraft. This was not because they didn’t have business use of the aircraft, it was because they had not kept detailed records of their use and had not considered the regulations under the Internal Revenue Code (274(d)), when they structured their aircraft operations (Engstrom et al. v. Comm. – TC Memo 2014-221).
It is accepted practice that a taxpayer may estimate deductions for certain business expenses if direct evidence of such deductions is not available (Cohan v. Commissioner, 39 F.2d 540,543-544 (2d Cir. 1930). However, under 274(d)(4) of the Internal Revenue Code, a higher standard of record keeping is set for deductions related to “listed” property, such as aircraft. The Code states that deductions falling under this subsection were open to tighter scrutiny and that the Treasury Department may establish additional regulations that specify the reporting requirements associated with these types of deductions.
The Court agreed that some of the deductions were allowable, as the reconstructed details of the flights made it easy to establish a business use for specific flights. However, there were many flights that were categorized as business flights that had no substantiation of business use, though. The Court ruled that Jack & Girardi needed to provide sufficient evidence for: (1) the amount of the expense; (2) the time and place of the travel; and (3) the business purpose of the expense. The Court stated, “The Degree of substantiation necessary to establish business purpose depends upon the facts and circumstances of each case, but contemporaneous documentation is deemed more credible than after-the-fact reconstructions.” Jack & Girardi had not provided the kind of contemporaneous details that the Court required and thus they were required to pay tax, penalties (20%) and interest on all of the unsubstantiated flights.
This steep penalty could have easily been avoided by keeping proper records at the time of the flights. The IRS will be using this ruling to “tighten the noose” on those taxpayers who do not keep contemporaneous records going forward. The key to avoiding the record keeping trap is to have an educated aviation tax professional assist you in your tax planning. FlyWealthServe LLC is the BEST aviation tax firm in the business and can help you take advantage of these deductions and remain compliant in your record keeping. Call (844) 246-9687 today for your free consultation.