IRS Issues Rules for Entertainment Use of Business Aircraft

The Internal Revenue Service has released final regulations governing tax deductions for entertainment use of business aircraft.

The final regulations in TD 9597 affect taxpayers that deduct expenses for entertainment, amusement, or recreation provided to specified individuals. They reflect statutory amendments under the American Jobs Creation Act of 2004 and the Gulf Opportunity Zone Act of 2005.  The regulations take effect on August 1.

The proposed regulations provide that expenses subject to disallowance under section 274(a) include variable costs such as fuel and landing fees, and fixed costs such as depreciation, hangar fees, pilot salaries, and other items not directly related to an individual flight. Commentators suggested that the final regulations should limit expenses subject to disallowance to the direct or variable costs of a flight and exclude fixed costs.  The final regulations do not adopt this comment because Section 274(e)(2) of the Tax Code does not explicitly differentiate between fixed and variable expenses and because such an interpretation is contrary to Congressional intent.

Separately, the IRS also released REG 101812-07, a notice of proposed rulemaking for reimbursed business expenses. The proposed regulations explain the exception to the deduction limitations on certain expenditures paid or incurred under reimbursement or other expense allowance arrangements. They affect taxpayers that pay or receive advances, allowances, or reimbursements under reimbursement or other expense allowance arrangements. The proposed regulations clarify the rules for these arrangements.