Friday, February 6, :30 a.m. 11:30 a.m. PRESENTED BY: George Rice, BIZJETCPA Nel Stubbs, Conklin de Decker Ann Widay, Qualcomm

Transcription

1 Fundamentals of Personal Use Friday, February 6, :30 a.m. 11:30 a.m. PRESENTED BY: George Rice, BIZJETCPA Nel Stubbs, Conklin de Decker Ann Widay, Qualcomm Schedulers & Dispatchers Conference San Jose, CA February 3 6, 2015

2 Fundamentals of Personal Use Topic Outline Why We Care About Personal use Introduction to Fringe Benefit Valuation Introduction to Entertainment Disallowance Differentiation of Personal Use Definitions & Terminology SIFL Exceptions & Special Rules Introduction to Fringe Benefit Reporting Recordkeeping Process & Procedures Other Ways to Handle Personal Use The Audit Process & Issues 2

3 What is Personal Use? Non-business use of an aircraft provided by the company to an employee Any chartered aircraft, fractional aircraft or wholly owned aircraft provided to the employee for non-business use What is Non-Business use? Flights for purposes other than the business of the company Flights that are for the business of the passenger, but not for the business of the company that has operational control of the aircraft. Outside board meetings or for other companies business Vacation, entertainment, recreation

4 Why do we care About Personal Use of a Company Aircraft Federal Aviation Regulations that govern payment Internal Revenue Service Rules that require either Imputed Income or Payment of the value of the personal use Loss of Aircraft Deductions based on the Personal Entertainment use of an aircraft seat by a Specified Individual Record Keeping/Documentation Requirements (Ann Widay)

5 Introduction to Fringe Benefit Valuation Fair Market Rule (IRS Code Section (b)(6)&(7)) Also known as the Charter Valuation Rule This is what it would cost to charter an equivalent aircraft Typically a higher amount than SIFL Non Commercial Special Valuation Rule (IRS Code Section (g)) Also known as the SIFL Rule The SIFL calculation is generally less than the actual cost of the flight. This may or may not be a good thing (i.e. Entertainment Use) 5

6 Fair Market Rule Calculation Can use Air Charter Guide or similar publication or call a 135 Operator. Be Consistent Divide the total cost by the number of passengers to get the cost/passenger Impute to the appropriate employee the total cost of personal passengers Does not take into account whether the employee is a control or non-control employee Typically a higher valuation than SIFL 6

7 Fair Market Rule Calculation Distance of flight 2000 statute miles Type of Aircraft = Citation X Approximately 4 hours Cost of charter flight approximately $5,000/hour, plus $139.67/hour for landing fees and crew expenses, plus $250/hour fuel surcharge, plus 7.5% FET on everything, catering $51.90 Cost of Flight = $ $ $250 = $ * = $5, $51.90 = $5, x 4 = $23,

8 Fair Market Rule Calculation 8 passengers, 3 personal $Cost allocated to each passenger $23,383.20/8 = $2, per person Imputed Income for 3 personal passengers = $8,

9 Basic Rules for Calculating SIFL Per person, per leg On all types of aircraft, including helicopters Value international flights Value personal use on Part 135 aircraft Sell seats versus sell aircraft Any individual who is less than 2 years of age, is always valued at zero

10 Basic Rules for Calculating SIFL (cont d) Definition of a Flight The distance is measured in Statute Miles From where the individual boards the aircraft to where the individual deplanes Round Trip = 2 flights On a passenger-by-passenger basis Deadhead flights are not valued Mileage incurred in an Intermediate Stop not included in mileage 10

11 SIFL Rule basic Calculation Status (business or personal) and type of Passenger (control employee or employee) If the Guest is an employee, spouse or dependent child Current SIFL Rates & Terminal Charge Aircraft Multiples Aircraft weight Control vs Non-Control Employee Flight Information such as Distance in Statute Miles, flights/legs, etc. 11

12 Calculating SIFL (cont d) Example Assumptions Aircraft weighs more than 25,000 pounds The one way trip is 2000 statute miles A Control and a Non-Control employee are on board for personal purposes Date of trip August 13,

13 SIFL Rule SIFL Rates are published by the IRS & NBAA twice a year 1/1/14 6/30/ miles = $ miles = $ Over 1500 miles = $ Terminal Charge = $ /1/14 12/31/ miles = $ miles = $ Over 1500 miles = $ Terminal Charge = $

14 SIFL Rule (cont d) Aircraft Multiples have been the same since the rule came out in 1989

15 500 x $ = $ x $ =$ x $ = $ Total $

16 Control Employee Non-control Employee 4($412.50) + $46.25 = $1, $46.25 = $1, per person 3 personal control employee passengers = $5, FMV = $8, ($412.50) + $46.25 = $ $46.25 = $ per person 3 personal non-control employee passengers = $

17 Valuation Rules Can the employee pay for this? IRS requires that an employee Pay, or Have the value imputed (added) to their income, For the benefit of flying on board a company aircraft for purposes not related to the business of the company. Or a combination of both FAA Rules In general, one cannot pay for non-business use of an aircraft, however imputation is good However, new FAA Chief Counsel interpretation, which allows certain employees the ability to pay on certain occasions. (Caution: Application of Commercial FET) 17

18 Valuation Rules If the employee wants to pay, there are other ways of being able to pay for Personal Use of aircraft Timesharing commercial FET Lease of aircraft with crew Limitation on what can be paid Charter commercial FET Can still affect Entertainment Use 18

19 Entertainment Rules Only apply to entertainment flights by Specified Individuals Officers, directors and owner of >10% shareholders President, board member, general partner, managing partner, certain shareholders, members and partners. Includes family members and guests Non-Specified Individuals Flights are fully deductible, no disallowance. 19

20 ENTERTAINMENT DISALLOWANCE RULES 3 Baskets: Types of Use Personal Business Use Personal Non- Entertainment Personal Entertainment 20

21 Expenses Subject to Disallowance Three Buckets of Cost Direct Operating Costs Fixed Costs and Expenses All Aircraft Expenses are subject to Disallowance! Taxes, Depreciation, Interest expense, lease payments 21

22 Entertainment Rules Basket #1: Business Use Expenses are Deductible 22

23 Entertainment Rules Basket #2: Non-Entertainment Use : Expenses are Deductible Personal, But not Entertainment & Recreation Visiting Investment Properties Other Businesses Unrelated Board Activities Travel to Other Job Locations Bereavement Commuting Always examine whether personal travel is nonentertainment or entertainment use 23

24 Entertainment Rules Basket #3: Entertainment Expenses are Not Deductible. Or, Only deductible up to the amount paid or imputed for personal use. Personal and Entertainment 24

25 Personal Use Definitions & Terminology Who is the employee? What does fringe benefit value mean? What does cost mean? How many passengers are there? What does entertainment disallowance mean? 25

26 Who Is the employee For SIFL purposes control employee Is an officer, highly compensated employee, 5 percent owner or director. The IRS defines control employee as any employee: Who is a Board or shareholder-appointed, confirmed or elected officer of the employer, limited to the lesser of 1 percent of all employees or 10 employees, Who is among the top 1 percent most highly paid employees of the employer (increased to the next higher integer, if not an integer) and limited to a maximum of 50, Who owns a 5 percent or greater equity, capital or profit interest in the employer, or Who is a director of the employer-company. Everyone else is a non-control employee Treas. Reg (g)(8)(i) 26

27 Who Is the employee For Entertainment Disallowance specified Individual The term specified individual is defined as any individual who is subject to 16(a) of the Securities Exchange Act of 1934 with respect to the company, or any individual who would be subject to it if the company were an issuer of equity securities subject to the Act. Under these rules, specified individuals generally include officers, directors and 10 percent owners. Officers are defined by reference to securities laws and include the principal financial officer, principal accounting officer or controller, vice presidents in charge of a principal business unit, division or function and any other officer who performs a similar policy-making function. IRC 274(e) (2)(B); Treas. Reg ; Exchange Act Rule 16a-2 27

28 Who Is the employee For SEC Disclosure Purposes - NEO s The term NEO refers to as any individual who is a Named Executive Officer generally those employees in the C Suites and is defined as: Each chief executive officer employed during a registrant s fiscal year; Each chief financial officer employed during a registrant s fiscal year; and The three other most highly compensated executive officers (other than the CEO and CFO) serving at the end of the last completed fiscal year of the registrant whose total compensation exceeded $100,000. Item 401(a) Regulation S-K 28

29 What is the fringe benefit value? Answer: The dollar amount to be included in the employee s income for tax purposes, or the amount disclosed in SEC Filing as a perquisite. How is fringe benefit value determined? Answer: It depends for what purpose Income tax purpose SEC disclosure purpose 29

30 Fringe benefit valued for Income Tax Purposes Determined Using the FMV rule aka the charter rule or Determined Using the SIFL rules Standard Industry Fare Levels Consistency Rules must be adhered to 30

31 SEC disclosure fringe benefit value means Aggregate Incremental Cost (AIC) All Direct Costs of any flight Fuel, hourly maintenance programs, etc. Trip related crew hotels & meals In flight beverages & catering Landing, ground handling, hangar or tie down Fixed Costs excluded crew salaries, property tax, insurance, depreciation AIC is generally greater than SIFL but less than FMV 31

32 What does cost mean? What is the cost of a fringe benefit to the employee? Fringe Benefit Value x Personal Income Tax Rate In reference to entertainment use of employerprovided aircraft cost means fully allocated costs of operating the aircraft including: All Fixed and Variable Costs Insurance & Property Taxes Interest on Debt secured by or properly allocated to an aircraft Depreciation (d)(1) 32

33 How Many Passengers? Dead head flights For SIFL Purposes For Entertainment Disallowance Purposes Owner-flown Aircraft Dispatched crew Infants under 2 years old 33

34 What does entertainment disallowance mean? What Costs & Expenses Are To Be Disallowed? IRS views broadly Regulations list many expenses to include see NBAA Personal Use Handbook, page 24 Tax Depreciation is included, straight line election? More than one aircraft? Aggregation of costs Clarification in final regulations - interest on aircraft loan is disallowed 34

35 Required Allocation Methodology Existing guidance prescribes two methods Occupied Seat Method Occupied Seat Hours Occupied Seat Miles Flight-by-Flight Method Flight Hours Flight Miles Choose the method with smallest percentage Special rule for deadhead flights 35

36 Calculating Entertainment Use Disallowance Using Method of Least Disallowance Total Cost Incurred $1,000,000 Includes Depreciation of $200,000 Entertainment Percentage x 20% Costs Subject to Disallowance $ 200,000 Less: Amounts included as SIFL 7,500 Amount Disallowed $ (192,500) Deductible Costs $ 807,500 36

37 SIFL: Exceptions & Special Rules Calculating Miles Mixed Purpose Flights Spousal Travel 50% Seating Capacity Bona fide Security Program 37

38 How to Determine Statute Miles Calculated Point to Point without considering Intermediate Stops Landings for fuel, weather, or emergencies are intermediate stops Ignore these intermediate stops when calculating the employee s flight distances Flight means each time the Employee Boards and Deplanes A round trip includes at least two flights If no employee is on board, no benefit received. (No charge for repositioning flights) 38

39 Mixing Business with Pleasure What is the primary purpose of each passenger? How much time was spent on business? On personal? Who was on the trip (employee alone or with spouse, kids)? Mixed use flights IF primarily business Multiple destinations; some for business, some for pleasure If trip primarily for employer s business include in income value of total trip less the value of the business flights Mixed use flights IF primarily personal Multiple destinations; some for business, some for pleasure If trip primarily personal include in income value of personal flights that would have been taken if no business 39

40 Spousal Travel General Rule: In most cases, spousal travel is personal Requirements for spouse to be treated as a business flight: Must be an employee of the employer Must travel on bona fide business purpose The travel expense must be otherwise deductible The mere expectation of the employer company that a spouse will attend a function requiring travel does not constitute employment 40

41 50% Seating Capacity Rule If 50% of the seating capacity is filled with employees traveling on business when the employee or family member boards and deplanes, then no fringe benefit is imputed. Seating capacity is determined based on the maximum number of seats installed at any time within prior 24 months. Seats not legal for takeoff are not counted. 41

42 Bona Fide Security Program Must Have a Study Done Must be Part of a Complete Program But May Be Limited to Certain Geographic Areas Specific Study for Family Members if they Travel Without Employee Use a 200% Multiplier regardless of Aircraft Weight and Control Status of Employee For Control Employees in Aircraft over 10,000 pounds, this is a significant savings 42

43 Introduction to Fringe Benefit Reporting Reporting for Income Tax Purposes Reporting Entertainment Disallowance SEC Reporting & Required Disclosures 43

44 Reporting for Income Tax Purposes The value of the fringe benefit less reimbursements must be included in the employees income: Form W-2 Form 1099 Form K-1 44

45 Reporting on Form W-2 The SIFL wage inclusion is aggregated with wages paid and reported in Box 1 and is separately reported and identified in Box

46 Reporting on Form 1099 January 31, 2014 is the deadline for furnishing the Form 1099-MISC to the employee. February 28, 2014 is the deadline to file Form 1099 with the IRS. Note: the date is extended to March 31, 2014 if you file electronically. 46

47 Reporting on Form K-1 47

48 Reporting cost disallowance 48

49 Reporting Depreciation Page 1 Page 2 49

50 Required SEC Disclosure If the value of personal use exceeds $10,000 It must be disclosed in the summary compensation table If the value exceeds $25,000 It must be explained in a footnote Value = AIC less any reimbursements Timeshare Timeshare agreements require related party disclosure 50

51 Recordkeeping Short term effort in good recordkeeping can spare you immense long term headaches (and possibly $$) Scheduling Communication Flight logs Receipts trail Reports Archiving Process 51

52 Recordkeeping Process Example: Aviation Department SIFL Calculation and CDA Reporting Personal for use of Corporate Jet Trip Request submitted Trip requestor On-line form No Was trip purpose/ passenger listing determined? SIFL Calculations Sent to SIFL.mail within 10 business days of FQ close Corp. Shared Services Accounting SIFL sent to employee, CC: SIFL.mail Payroll Dept W2 income adjustment to appropriate employee Payroll Dept Payroll System Is there uncertainty to requested trip purpose? Yes sent to requestor & admin requesting trip purpose clarification Sent from Aviation CC Tax Yes Invoices received, reviewed for accuracy and compared to specific trip dates and locations Aviation (Data Entry Person) Dispute invoice, request backup, locate correct trip No Trip scheduled Aviation Dept Aviation data base Quarterly trip purpose report/ flight log created Aviation Dept Aviation data base to Excel doc Yes SIFL calculation(s) approved? No Trip purpose report / flight log reviewed to identify personal travel for SIFL calc including statute miles per flight leg Aviation, Tax and Corp. Shared Services Accounting Excel doc SIFL calculation(s) reviewed Aviation & Tax Excel doc Calculate SIFL income adjustment based on approved flight log & current IRS guidelines/ rates Corp. Shared Services Accounting Excel doc Costs Validated? Yes Enter Costs in to trip db, documenting Vendor and invoice # Aviation (Data Entry Person) No 2 weeks after Quarter end, run report from Scheduling Software on Personal trips or trips with personal guests, extract costs for Specified Individuals. Rerun reports for prior 2 quarters to determine any additional costs that have arrived. Aviation Analyst Enter new expenses and any expense differences for prior quarters in Excel spreadsheet, review line item entries against individual trip cost entries. Aviation Analyst CDA Calculations ed to SEC Team Aviation Analyst 52

53 Recordkeeping Process Example, cont. Trip Request submitted Trip requestor On-line form No Was trip purpose/ passenger listing determined? SIFL Calculations Sent to SIFL.mail within 10 business days of FQ close Corp. Shared Services Accounting Is there uncertainty to requested trip purpose? Yes sent to requestor & admin requesting trip purpose clarification Yes Sent from Aviation CC Tax No Trip scheduled Aviation Dept Yes SIFL calculation(s) approved? SIFL calculation(s) reviewed Aviation & Tax Excel doc Aviation data base No Quarterly trip purpose report/ flight log created Aviation Dept Aviation data base to Excel doc Trip purpose report / flight log reviewed to identify personal travel for SIFL calc including statute miles per flight leg Aviation, Tax and Corp. Shared Services Accounting Calculate SIFL income adjustment based on approved flight log & current IRS guidelines/ rates Corp. Shared Services Accounting Excel doc 53 Excel doc

54 Recordkeeping Process Example, cont. SIFL Calculations Sent to SIFL.mail within 10 business days of FQ close Corp. Shared Services Accounting SIFL sent to employee, CC: SIFL.mail Payroll Dept W2 income adjustment to appropriate employee Payroll Dept Payroll System Invoices received, reviewed for accuracy and compared to specific trip dates and locations Aviation (Data Entry Person) Dispute invoice, request backup, locate correct trip No Costs Validated? Yes Enter Costs in to trip db in Scheduling software, documenting Vendor and invoice # Aviation (Data Entry Person) Enter new expenses and any expense differences for prior quarters in Excel spreadsheet, review line item entries against individual trip cost entries. Aviation Analyst CDA Calculations ed to SEC team Aviation Analyst 2 weeks after Quarter end, run report from Scheduling software on Personal trips or trips with personal guests, extract costs for Specified Individuals. Rerun reports for prior 2 quarters to determine any additional costs that have arrived. Aviation Analyst 54

55 Non-Business Use Options Summary Options exist that permit executives to pay for their use of Company aircraft for their personal travel. Nichols Interpretation Available to executives identified by BOD as key executives No FAA requirement of written agreement between Company and executive. Allows executives to pay for one category of their personal flights Routine Personal Travel FAA prohibits reimbursement by family, guests or non-key executives May not eliminate proxy compensation table disclosure of all their personal flights Requires BOD determination in advance of each personal trip whether the trip is within the category of personal flights for which the key executive may pay

56 Non-Business Use Options, cont. Timesharing Agreement or Charter Certificate No key executive specification requirement Permits payment for all personal flights (including guest travel) Avoids SIFL and SEC proxy disclosure of personal flights Does not require on-going administration by BOD

57 Non-Business Use Options, cont. Timesharing Agreement Can be implemented immediately Agreement must be in writing, filed with FAA 24 hours after execution with FAA notified 48 hours before first timeshare use Reimbursement limited to specific items per FAR Copy of agreement must be carried on flight Important that pax and crew all understand trip type Charter Certificate No FAA limit on reimbursement. No FAA requirement of written agreement between executive and Company (or charter company), but one is advisable Charters subject to mandatory crew duty and flying time limits Charters subject to operational limits Depending on your aircraft, MX modifications might be needed

58 Non-Business Use Options, cont. Potentially applying to all If an aircraft is used primarily for non-business use, depreciation schedule may change from 6 to 8 years FET may apply Potential liability to company for damages sustained during travel Legal and Regulatory review (check with the experts!) Possible SEC Related Party Transaction reporting requirement Possible SOX 402 concerns

59 IRS Examination Basic Corporate Tax Rules General Rule - Expenses associated with business use of a corporate owned or leased aircraft are deductible as a business expense under IRC 162 Expenses associated with entertainment use of a corporate owned aircraft are generally disallowed as a corporate deduction Entertainment Use IRC 274(a) bars the deduction of expenditures for goods, services, and facilities in connection with entertainment, amusement or recreation unless the taxpayer proves that the expenditure is directly related to or associated with business. Despite the general entertainment expense disallowance rule noted above, IRC 274(e)(2)(A) provides that the cost of providing entertainment to an employee is deductible so long as the value associated with entertainment is included in the non-specified employee s taxable income subject to income tax withholding. What this means is that the corporation is allowed a full tax deduction for the cost of providing the entertainment (including fixed costs, depreciation, etc.) even in cases where the amount of income imputed to the employee is less than the cost of providing the entertainment. The ability to deduct costs greater than the proper value imputed only applies to non-specified individuals. For specified individuals a deduction for entertainment expenses is only allowed to the extent such expenses are included in the specified individual s taxable income. See- IRC 274(e)(2)(B)(i). In other words, in the case of specialized individuals a corporation will lose a deduction for costs incurred in providing entertainment in excess of the amount imputed to the individual. 59

60 IRS Examination When the IRS conducts an audit their main objectives are to ensure: Fixed and variable operating costs associated with personal/entertainment use of a corporate aircraft are not deducted unless specifically allowed by the Code and Regulations Costs associated with personal/entertainment use that are not reimbursed by the employee are imputed as taxable income and that individual taxes are paid on such income 60

61 IRS Examination Audit Procedures The IRS uses Form 4564, Information Document Requests ( IDR ) to request information from a corporate taxpayer in connection with audit. IDR requests would likely cover the following areas: Number and type of aircraft owned, leased or rented by the taxpayer Explanation why travel by private aircraft is necessary to conduct the taxpayer s business Total aircraft operating expenses Corporate aircraft deduction disallowance calculations Imputed income calculations and verification that income was included in the employee s W-2 Flight logs Personal vs. business classification for each flight segment Passenger manifests Documents supporting the business nature of flights 61

62 IRS Examination Additional Thoughts It is often the case that companies and the IRS have different perspectives on what constitutes business use of an aircraft. Companies tend to more readily classify flights as business when there is at least some business purpose. The IRS tends to be rules focused and will base its audit findings on the application of such rules. These different perspectives can lead to conflict and potential financial risk during an aviation audit. 62

63 Did I mention The value of good recordkeeping? Sales and Use Tax Property Tax FAA Aircraft sale and acquisition Historical report requests Budget planning Legal Audit 63

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