With tax time looming at the next fiscal waypoint, it might be a good time to mention Section 162 of the Internal Revenue Code, which says that deductions are allowed for ‘ordinary and necessary expenses paid or incurred‘ in sustaining ‘any trade or business.’ Why? Because flying is expensive, and there are some rules that just might save you some money, so why not exploit them… er, take advantage of them… er, use them? Whew. Unfortunately, their wording is so diffuse that the usual recourse for interpretation consists of reviewing case histories and previous rulings. This is the time of year that some of us wish we participated in AOPA’s Legal Services Plan. Well guess what? I have, and I’ll share some of what I’ve learned.
NOT JUST FOR BIG WHEELS
It doesn’t have to be your business. You don’t have to be incorporated, or involved in a legal partnership; the law allows an individual to be engaged in a ‘trade or business‘ just by being an employee.
Translation: If you can convince the IRS that your aircraft operating expenses are ‘ordinary and necessary,’ you can deduct those expenses if you use the aircraft to further your employer’s business.
What is an ordinary expense? It is one that involves a common and accepted business practice. An example would be the use of private airplanes by executives overseeing large projects. What’s harder is ‘necessary‘. The court ruling here is that it be ‘helpful;’ if you can show that having direct access to destinations, flexible scheduling, fewer hotel bills, etc. saves you money, then you can make a go of it. Important: Whether it’s aircraft rental, instruction, banner towing, aerial photography, or anything else, you must have engaged in this activity for profit (no hobby flying — according to Internal Revenue Code Section 183). And if you’ve made a profit during three or more of the previous five years, take three big steps forward from presumption to fulfillment.
Suggestions from the legal beagles, based on case histories:
- If you’re an employee, get formal approval in writing from your employer. (And once you establish the precedent of even one reimbursement, even if it’s only partial, the contention that your expenses were necessary is on even more solid footing.)
- Be able to show just how helpful a private aircraft was towards meeting your firm’s schedule. (With over 17,000 airports in the U.S. — only about 430 of which are served by commercial airlines — this isn’t too much of a stretch. Many smaller firms often have customers and other business contacts in outlying areas.)
- Be ready to support expenses as reasonable with quantitative comparisons between your aircraft expenses and the cost of commercial airfare. (Important: In two recent cases, the IRS did not want to consider depreciation as a factor, so don’t bother…)
HOW TO DO IT:
First, it isn’t a good idea to go solo. There may be some element of job security involved here, but they say (and I believe them) that the forms are complicated, and the necessary calculations can be difficult. Seek the advice of appropriately trained tax professionals. Second, the IRS considers aircraft expenses as being ‘miscellaneous‘ itemized deductions, and as such, they are subject to a two percent ‘floor‘ based on adjusted gross income. (That might knock you out of the ring altogether.) But if you think you’re still in the running, get hold of IRS Form 2106. (If you’re self-employed, aircraft expenses incurred for business purposes are reported on Schedule C; if you’re a corporation, it’s IRS Form 1120 (with your share on Schedule K-1); and if you’re a partnership, it’s IRS Form 1065 (and again with your share of income, credits, and deductions on Schedule K-1 for the 1065.)
***Serious Business: iPilot.com is not a tax advisor and is not aware of the specifics of your situation — some of these forms may not apply to you. Take these forms along with this article to your tax professional, and apply this article as a starting point, not gospel.
What about FLIGHT TRAINING?
Certain training activities may qualify as deductions if you need them to:
- maintain or improve a skill required for your employment; or
- to meet any requirement imposed as conditions for maintaining or improving skills required for you to perform your job.
If either of these apply, you have a chance.
Flight training expenses will NOT qualify if it was used to meet minimum educational requirements, or to qualify you for a new business. If your flying isn’t business related at all, forget it.
- If you fly for a Part 135 operation, and you’ve got to take courses to learn a new aircraft’s systems… or if you just attend a flight instructor refresher clinic… those are deductible expenses. (Flight training #1, above.)
- If you use an aircraft for business trips, you may be able to deduct the expenses for getting an instrument rating. (Flight training #2, above.)
- Even expenses related to training and proficiency flying have been considered as justifiable expenses for ‘maintaining or improving required skills.’ The same forms as mentioned above in ‘How to do it‘ apply. Again, that ‘two percent of your AGI‘ floor thing applies here, too.
- The training expenses for becoming a CFI aren’t deductible.
- Training for a commercial certificate is also not deductible. (Both can be said to qualify one for a ‘new trade or business‘.)
NOT JUST WORK
In addition to all of that, if you belong to a public service organization such as the Civil Air Patrol (CAP), you can claim various expenses as charitable contributions. The CAP is a federally chartered nonprofit organization, tax exempt under Section 501(c)(3) of the IRS Code. This means members can deduct membership dues, expenses for uniforms and training materials, out-of-pocket expenses while participating in CAP activities, mileage on personal vehicles, and travel and living expenses while participating in CAP activities.
BOTTOM LINE: For most of us, studying tax law is like solo hood work (you don’t want to do it), and often brings physiological reactions similar to flying partial panel with a dead alternator. Still, aside from the credo ‘fortune favors the audacious,’ is the relevant adage ‘if you don’t ask, you’ll never know‘. In other words, the gummint sure ain’t gonna tell you; you’ve gotta find out for yourself! Take this knowledge to your tax professional, use it to point them in the right direction and let them sort out the mess for you. You’ll be wiser… and perhaps wealthier… for their effort.