Beyond SIFL: Advanced Personal Use Considerations · Report SIFL •Deductible •No ... Gulfstream...

Beyond SIFL: Advanced

Personal Use Considerations

PRESENTED BY:

Joanne Barbera, Barbera & Watkins, LLC

Doug Stewart, Aircraft Logs

Schedulers & Dispatchers Conference | New Orleans, LA | January 14-17, 2014

Friday, January 17, 2014

10:30 a.m. – 11:45 a.m.

Circular 230

Treasury Circular 230 Disclosure: To ensure compliance with

requirements by the IRS in Circular 230, we inform you that,

unless we expressly state otherwise in this communication, any

tax advice contained in this communication is not intended or

written to be used, and cannot be used, for the purpose of (i)

avoiding penalties under the Internal Revenue Code or (ii)

promoting, marketing or recommending to another party any

transaction or other matter addressed herein.

Treasury Circular 230 Disclosure

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3

Questions are welcome during

the presentation

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Beyond SIFL: Advanced Personal Use

Considerations

1. IRS entertainment use disallowance

2. SEC reporting rules for public companies

3. Strategies for reducing disallowance or perk

4. Note on aircraft use policies

5. Discussion of examples

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IRS Entertainment Use Disallowance

IRS tax issues with aircraft “personal” use — SIFL and

Entertainment Use Disallowance

5

Background

SIFL – Income

to employee?

This presentation

Deduction/

disallowance-

Expense

deduction for

company?


• Additional level of tax compliance at the company level

• Effective since October 2004

• Final regulations issued in 2012

• For expenses associated with the aircraft, deductions for

specified individuals’ personal entertainment use are disallowed

– To the extent the expenses exceed the amount treated as

compensation or reimbursed

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Background


• Tax view: flight department = expenses

– Aircraft price and other acquisition costs

– Refurbishment/outfitting/modernization/major repairs

– Interest payments

– Maintenance/inspection

– Hangar, security and utilities

– Insurance

– Pilots, flight attendants, maintenance technicians, schedulers

and any other salaries, benefits and training

– Management fees

– Trip expenses and handling

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Expenses


• Deductions offset gross income to reduce taxable income

• Compare:

– Annual costs with no deductions allowed

• No expenses or depreciation deductions available

– Example: Annual costs and potential depreciation of $6 million

– Annual costs with 100% deductions allowed

• Expense and depreciation deductions available

– Example: Assuming annual costs and potential depreciation of $6 million and 35% tax rate, potential savings of $2.1 million in taxes

• Bottom line: entertainment use disallowance makes portion of flight department non-deductible

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Impact of Deductions


• Data collection and good, contemporaneous recordkeeping

• Track all expenses and all use

• For each passenger, each leg

– Identify passenger and type (control/non-control, specified

individual)

– Describe purpose if business or personal non-entertainment

• Trip information for calculations

– Leg hours

– Leg statute miles

– Live and deadhead legs

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Requirements for Deduction


• Applies to personal entertainment flights by specified individuals

– Specified individual = every officer, director and beneficial owner of

˃ 10% of any class of any equity security

– Includes family members and guests

– Includes a specified individual of a related party

Note: All Specified Individuals are (SIFL) Control Employees but not all

Control Employees are Specified Individuals

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Specified Individual


• Which of the following is a specified individual?

a. A 49% partner in a 2-person partnership

b. The paid nanny for the Board Chairwoman’s child?

c. The brother of the CFO

d. The spouse of the CEO

e. All of the above

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Specified Individual — Question


• Objective test for “entertainment, amusement or recreation”

– Narrower than fringe benefit rules’ “personal”

• Proposed rules comment: Entertainment does not include non-

employer business, medical purposes, attending funerals,

charitable activities

– Use primary purpose test

– Formal rule only example is attending funerals

• Includes entertainment flights under a security plan

• Deadheads count

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Personal Entertainment Use


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Three Buckets of Flights

• Report SIFL • Disallowed

• Report SIFL • Deductible

• No SIFL • Deductible

Personal

Entertainment

Personal

Non-Entertainment


• CEO and CFO fly on the company’s large-cabin business

aircraft, on roundtrip flights from HPN to DAL (5 hours each way)

for business 10 times during the year.

– CEO and CFO are specified individuals

– Occupied Seat Hours for each trip = 20 (2 passengers x 5 flight

hours x 2 flights)

– Business Occupied Seat Hours = 200 (20 Occupied Seat Hours for

each trip x 10 trips)

• Business flights are deductible, don’t trigger disallowance

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Simple Example


• CEO’s family (7 guests) accompany CEO on the company’s large-cabin business aircraft, for a roundtrip flight from HPN to ASE (4 hours each way) for a holiday vacation.

– CEO is a specified individual

• CEO’s family would be considered entertainment by a specified individual and so the deduction is disallowed

• Result:

– Business Occupied Seat Hours = 200

– Occupied Seat Hours for flight = 64 (8 passengers x 4 flight hours x 2 flights)

– Annual Occupied Seat Hours = 264 hours

– Percentage Business Occupied Seat Hours = 76% (200 Business Occupied Seat Hours / 264 Annual Occupied Seat Hours)

– Percentage Entertainment Occupied Seat Hours = 24% (64 Entertainment Occupied Seat Hours / 264 Annual Occupied Seat Hours)

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Simple Example (cont.)


4 Calculation Methods

• Occupied Seat Hours – Occupied Seat Hours for each flight = total flight hours x number of

passengers

– Cost per occupied seat hour = annual aircraft expenses / annual

occupied seat hours

– Disallowed Deduction = Disallowed Occupied Seat Hours per flight x

cost per hour

• Occupied Seat Miles – Occupied Seat Miles for each flight = total flight miles x number of

passengers

– Cost per occupied seat mile = annual aircraft expenses / annual

occupied seat miles

– Disallowed Deduction = Disallowed Occupied Seat Miles per flight x

cost per mile

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Calculation of Disallowance


4 Calculation Methods (cont.)

• Flight by Flight Method by Hours

– Cost per hour = annual aircraft expenses/annual flight hours

– Expenses for the flight = cost per hour x flight hours

– The expenses for the flight are then allocated to the passengers on

the flight per capita

• Flight by Flight Method by Miles

– Cost per mile = annual aircraft expenses/annual flight mile

– Expenses for the flight = cost per mile x flight miles

– The expenses for the flight are then allocated to the passengers on

the flight per capita

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Calculation of Disallowance


• Multi-leg trips involving entertainment and business legs

– The entertainment cost of a multi-leg trip is the total cost of the

flights over the cost of the flights that would have been taken without

the entertainment segment or segments.

• Deadhead

– Treated as having the same number and character of passengers

as the leg of the trip to which the deadhead relates

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Multi-Leg Trips and Deadheads


• Which trip most likely creates a deduction limitation?

a. Two district managers traveling to play gulf on empty seats of a

business trip. 3 seats are occupied for business.

b. The CEO, spouse, child, and paid nanny travel to Omaha to attend

a board meeting of another company.

c. The brother of the CFO accompanies the business passengers to

the Kentucky Derby

d. All of the above

e. None of the above

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Personal Entertainment Use — Question

SEC Reporting Rules for Public

Companies

• Required when soliciting shareholder votes

• Published before annual shareholder meetings

• Reporting by publicly-traded companies regulated by the SEC

• Provides key information to shareholders: – Background of executives and the BOD

– Specific compensation details of Named Executive Officers (NEO’s)

– Compensation for the BOD

– Related party transactions over $120,000

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What is a Proxy Statement?


Companies

• Personal aircraft use is reportable

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Executive Perquisites (“Perks”)


Companies

• Must Disclose the “Value” of Aircraft Personal Use for each

“Named Executive Officer” (NEO)

• Amounts exceeding $10,000 must be disclosed

• Amounts exceeding the greater of $25,000 or 10% of total perks

require separate footnote explanation

• Value = “Aggregate Incremental Cost” (AIC) of Providing the

Compensation. Significant variations in calculations across

reporting companies.

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SEC Disclosure Rules

Just one non-business round trip between LAX and Teterboro can trigger footnote explanations


Companies

• Those costs which the company would not have incurred if there

had been no personal use of the plane by an NEO or their guests

• Easy for “out & back” flights, where the whole trip is personal

• Complicated for multiple destinations and mixed use

• Complicated for deadheads and repositioning

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Aggregate Incremental Cost?

You can “Make the Call,” but… This is filed on the Internet


Companies

IRS

Disallowance

IRS

SIFL

SEC

AIC

Are There Rules? Yes Yes Yes

Are Affected Parties Defined? Specified

Individuals

Control

Employees NEO’s

Is the Basis of Cost Defined? Yes SIFL rates

published No

Is There a Prescribed

Formula?

Yes

(4 of them!) Yes No

Guidance for Mixed Purpose

Flights ? Yes

(Follows Passenger)

Yes (Follows

Passenger)

No

Guidance for Deadheads? Yes Yes No

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SEC Reporting is Subjective Comparison of Reporting Requirements


Companies

• Use of actual operating costs

– Inclusion of variable costs (fuel, trip-related expenses)

– Exclusion of fixed costs (salaries, depreciation, maintenance)

• Use of an hourly rate, plus trip expenses

– Published hourly rate for the specific aircraft, or

– A company-specific hourly average

• Estimating the “Incremental” flight hours caused by personal legs:

Total Trip Hours

less: Hypothetical “Business Only” Hours

equals: Incremental Hours from Personal Use

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Common Practices


Companies

“The amounts shown are the incremental cost of personal use of

Company aircraft to Phillip Morris and include the cost of trip-

related crew hotels and meals, in-flight food and beverages,

landing and ground handling fees, hourly maintenance contract

costs, hangar or aircraft parking costs, fuel costs based on the

average annual cost of fuel per hour flown, and other smaller

variable costs.”

“Fixed costs that would be incurred in any event to operate

Company aircraft (e.g. aircraft purchase costs, depreciation,

maintenance not related to personal trips, and flight crew salaries)

are not included.”

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Sample Footnote (Phillip Morris)

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Don’t Separate SIFL and AIC Decisions

Three Buckets of Flights

• Report SIFL • Disallowed

• Report SIFL • Deductible

• No SIFL • Deductible

For NEO’s, these flights are reportable

Personal

Entertainment

Personal

Non-Entertainment


Companies


Companies

• For NEO’s, the AIC disclosure is closely

related to SIFL

• Flights which trigger SIFL for NEO’s are

compensatory

• SIFL can be disclosed for informational

purposes, but does not satisfy AIC

disclosure requirements

• The incremental cost is generally much

greater than SIFL

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“Hand in Hand” - SIFL and SEC

Sample Round Trip LAX & TEB

9 hours Gulfstream G-IV

SIFL:

$4,261 / person

Incremental Cost: $33,300 $3,700/hour

Retail Charter:

$60,000

TRUE or FALSE:

Aggregate incremental costs are the amount associated with a

personal flight “perk” reportable in the Executive Compensation

Table of the company’s proxy Statement.

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Question


Companies

Strategies for Reducing

Disallowance or Perk

• Increase business use and business passengers (helps reduce

disallowance)

• New plane strategy

– Generally, big depreciation in first year

– Avoid personal entertainment use by specified individuals in first

year

• Reimbursements, to the extent permitted by FAA

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Generally

• Time Sharing Agreements – Reimbursements can reduce SIFL to zero and approximate “aggregate incremental cost”, reducing the magnitude of the “other compensation” disclosure.

– May require disclosure of a related party transaction or 8K filing

– Only partly offsets IRS personal entertainment use disallowance

• Reimbursement under the “Nichols Interpretation”

– Up to full reimbursement under specified circumstances (executive must be on board for personal purposes, spouse/dependents notwithstanding)

– May require Form 8K filing

– Should reduce SIFL to zero

– May offset personal entertainment use disallowance

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Reimbursements — FAA Part 91



An emerging trend is for executives to reimburse the company via time sharing agreements.

• “Two Times Fuel”: Under FAR 91.501(c)(1) & (d), a time sharing agreement allows an aircraft operator to be reimbursed for a limited set of costs for a flight.

– Fuel, oil, lubricants, and other additives.

– Travel expenses of the crew

– Hangar and tie-down costs away from home base

– Insurance for a specific flight

– Landing fees, airport taxes, and similar assessments.

– Flight-specific customs, foreign permits, and similar fees

– In-flight food and beverages.

– Passenger ground transportation.

– Flight planning and weather contract services.

– An additional charge equal to 100 percent of the expenses listed in item 1 (fuel)

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Reimbursements — Time Sharing Costs



NEO’s AIC

Disclosure of Time Sharing Agreement with NEO

Strategies for Reducing Disallowance

or Perk

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SEC Time Sharing Example



• Specified individual/NEO/Director pays for aircraft charter

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Reimbursements — FAA Part 135



What is the maximum allowable time share reimbursement amount?

a. Two times the SIFL amount

b. Fully allocated costs of owning and operating the aircraft for the

flight including crew and depreciation expense

c. Whatever the CEO says

d. Direct expenses of the flight, excluding crew costs plus an

additional 100% fuel

e. The fair market charter rate

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Reimbursements — Question

Note on Aircraft Use Policies

• Compliance tool (not required)

• Who may request a flight

• For what purpose

• Information and approvals

• Special arrangements (i.e. personal use allowances)

• No plane no gain aircraft use policy resource

– http://www.noplanenogain.org/images/1255958488.pdf_copy1.pdf

Company Aircraft Use Policy

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Note on Aircraft Use Policies

TRUE or FALSE:

Every company is required by federal law to have a written aircraft

use policy in place prior to non-business use of its aircraft.

Company Aircraft Use Policy — Question

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Examples

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Profile of Our Company….

• Corporate HQ: Washington DC

• Major office in Fort Lauderdale (FXE)

• CEO lives in Washington DC area

• Vacation home in Palm Beach (PBI)

• Falcon 900 at Manassas (HEF)

• DOC’s $3,600/hour

• Two hour flight to either PBI or FXE

• 91.501d Time Sharing Agreement

(“TSA”) – reimbursing 2X fuel, plus

expenses

West Palm (PBI)

Washington (HEF)

Ft. Lauderdale (FXE)

It’s never just about the destination. It’s the “facts & circumstances” of a trip. 39

Example #1: “Textbook”

Spring Break (Personal Entertainment)

A week on the beach!

• Aircraft drops CEO’s family at PBI

• Aircraft picks them up next week

• CEO drives to Fort Lauderdale for

afternoon meeting (always working!)

Four Impacts:

• IRS SIFL for occupied legs

• IRS Disallowance on all legs

• SEC incremental cost reporting on all legs

• Optional TSA reimbursement?

• Afternoon meeting was insignificant

West Palm (PBI)

Washington (HEF)

Ft. Lauderdale (FXE)

This is easy – and most CEO’s would “self declare” if asked whether this was personal entertainment. 40

Example #2: “Textbook”

Overnight Meeting in Fort Lauderdale

Day-Long Meeting in Fort Lauderdale

• Monday night: Aircraft drops CEO a PBI

• CEO sleeps at vacation home

• Aircraft stays PBI while CEO attends

meeting in Fort Lauderdale

• Tuesday evening: CEO drives to PBI for

aircraft pickup and return to HEF

No Reporting Impacts:

• All business flights

• Sleeping in PBI home incidental to trip

All business….but Palm Beach could create skepticism 41

Example #3: “In the Gray Area”

Monday Meeting in Ft. Lauderdale

“Facts & Circumstances”

• Friday drop-off : CEO and spouse in PBI

• Aircraft returns HEF

• CEO works in Fort Lauderdale on Monday

• Both return HEF on Monday evening

Gray Area Topics

• SIFL for spouse (relatively clear)

• Disallow spouse seats (probably)

• SEC: Any incremental cost to company?

(deadheads)

• Which came first: PBI or the meeting?

Time sharing triggered? What’s the CEO’s view of this trip? 42

Example #4: “In the Gray Area”

Weekend Planning Retreat in Ft. Lauderdale

“Facts & Circumstances”

• CEO & 3 VP’s participate

• Spouses ride along on Friday night

departure; aircraft & crew stay as well

• Executives meet all day Saturday at office

• CEO & spouse entertain team both nights

at their home

• Full aircraft returns HEF on Sunday

Gray Area Topics

• SIFL for spouses (relatively clear)

• Disallow spouse seats? (depends on

activities)

CEO & VP’s? Consider “Ordinary & Necessary” rules. Tell me about the Fort Lauderdale office again…. 43

THANK YOU

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Beyond SIFL: Advanced Personal Use Considerations · Report SIFL •Deductible •No ... Gulfstream...

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