The IRS recently released a redacted version of its internal business aircraft tax training materials in response to a Freedom of Information Act request, including a sample initial Information Document Request (IDR)(IDR 1, IDR 2) highlighting a broad scope of aircraft audits.
The materials showcase the significant level of substantiation the IRS expects businesses to maintain in support of their tax treatment of business aircraft.
Business aircraft, as listed property used for travel, are subject to the enhanced substantiation requirements imposed by Section 274(d) on all deductions associated with the vehicle.
The sample IDR includes a request for extensive categories of information, including but not limited to the following:
- The flight log (which should include for each flight during a taxable year, among other information, the date, origin city, destination city, flight time, and name of pilot in command)
- Passenger manifests listing each passenger on each flight and whether they are or related to any control employees, specified individuals, and/or 5% owners (as specifically defined in the applicable regulations) — who are subject to special rules
- For each passenger on each flight provide (i) the purpose of the flight, (ii) documentation to support the business relationship of each passenger, (iii) contemporaneous documentation that supports the business purpose of each trip and each passenger characterized as business, and (iv) if the supporting documentation is not contemporaneous, the contemporaneous supporting documentation that was relied upon to reconstruct the substantiation
- Aircraft lease, charter and operating agreements
- Minutes and documents indicating the business purpose of the aircraft
- Income inclusion computations relating to the personal use of the aircraft
This release follows the IRS announcing in February 2024 an increase in its scrutiny of business aircraft tax matters, including audits that would initially focus on whether taxpayers properly allocate flights between personal and business usage. Personal use generally results in income inclusion by the individual using the aircraft and could also impact the business’ eligibility to deduct expenses incurred to provide the aircraft.
Grant Thornton Insight:
This release of the training materials and sample IDR indicates that the expanded audit activities will require businesses to provide significant documentation to substantiate their tax positions. Because this area of the tax law is complex and includes many special rules, exceptions and gray areas, businesses that own, lease or charter aircraft should prepare by closely reviewing their compliance with the numerous potential tax provisions that can apply to business aircraft and, to the extent necessary, supplementing the substantiation of their tax positions.
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