IRS Expands Radar to Close Corporate Jet Tax Break Loophole

Companies should brace for turbulence as the Internal Revenue Service (“IRS” or “Service”) zeroes in on dishonest corporate jet tax breaks. The IRS disclosed internal training materials under the Freedom of Information Act that outline key data points auditors will focus on during their new corporate jet auditing campaign, which was announced early in 2024. (Erin Schilling, Bloomberg). Funded by the 2022 Inflation Reduction Act (“IRA”), the corporate jet auditing campaign is part of the IRS’s Strategic Operating Plan which seeks to further the Service’s objective of expanding tax compliance enforcement to ultrawealthy individuals, corporations, and complex partnerships. (Erin Schilling, Bloomberg; Erin Slowey, Bloomberg; Daniel Werfel, Department of the Treasury; IRS). This article dives into why the IRS is implementing more audits on the use of corporate jets, how deductions could affect a company’s bottom line, and how this new focus will impact companies and the US moving forward.

The IRS may have evolved a more aggressive audit strategy to combat lower tax revenue following implementation of the Tax Cuts and Jobs Act (“TCJA”) in 2018. Because the TCJA’s tax cuts for the ultra-wealthy increased federal debt, the IRS is adding campaigns, such as for corporate jet tax audits, to recoup tax revenue. (William Gale et al., Journal of Economic Perspectives). In effectuating the IRA, the IRS increased specific targeting for the most affluent tax brackets, including foreign-owned corporations, hedge funds, large law firms, and ultra-wealthy individuals. (IRS). Through these new initiatives, the Service reported recovering almost half a billion dollars in unpaid tax debt in 2023. Id. The IRS owes its success in part to a dramatic reversal in pre-IRA low audit rates supported by its new audit initiatives. Id.

The IRS’s new campaign for auditing corporate jets focuses on eliminating tax breaks for personal travel falsely logged under business purposes. (Erin Schilling, Bloomberg). When a plane is used for a business trip, operating costs including fuel and crew, among other expenses, can be deducted. (Paul Kiel, ProPublica). As a result, some individuals have created unethical loopholes to write off personal travel, for example, by including a first stop at a friend’s business on the way to their vacation home. Id. During a press call in February 2024, IRS Commissioner Danny Werfel reiterated that the IRS is concerned that people are wrongfully writing off personal use of corporate aircraft to receive unwarranted business tax deductions. (IRS). Commissioner Werfel believes that with expanded resources provided for under the IRA, the new jet audits will crack down on exploited loopholes to ensure jet owners pay their fair tax share. Id.

Business owners should expect to rely less on previously unquestioned tax breaks for their aircraft use, and executives should consider updating their recordkeeping practices to prepare for more stringent oversight into their day-to-day operations. (John Hoover, Bloomberg). The new IRS training materials outline tests targeting bonus depreciation, a tax tool that allows businesses to write off a significant percentage of an asset’s cost after being purchased and utilized for business purposes. (Thomson Reuters; Bloomberg). Whether a corporate jet qualifies for bonus depreciation is outlined within the auditor training materials, which provide two tests to be met: “25% business use by employees other than the company’s 5% owners, and 50% business use overall.” (Erin Schilling, Bloomberg). Auditors may start requesting additional documents, including passenger manifests, flight logs, and charter contracts to ensure personal use of jets is not muddled with flights made for business purposes. Id. Experts warn of an increased audit risk especially for the 2021 and 2022 tax years, which predate the “Republican 2017 tax overhaul” which killed the 100% bonus depreciation tax deduction. (Erin Schilling, Bloomberg; Tonneson). With the Service’s present focus on stricter recordkeeping and increased documentation, it should come as no surprise that many businesses and individuals are pushing back.

Critics argue that the IRS’s new auditing campaign is counterintuitive considering the positive impact business aviation has on the US economy. (John Hoover, Bloomberg). Citing the existing complexities of aviation tax law, some complaints protest that the new campaign would exacerbate the already laborious audit process. (Erin Schilling, Bloomberg). The complaints add that the IRS has been more aggressive with compliance over the last ten years and that the new campaign further encumbers corporations with time-consuming document requests. Id. Furthermore, business leaders comment on how audits have been painfully unforgiving in recent years with agents asking increasingly detailed questions that require a wider breadth of documentation and a stricter level of scrutiny. Id.

In sum, affected corporations will incur expenses paying proper taxes on personal and mixed flights, but this is now necessary to avoid the wrath of the IRS. It would also be a wise idea for businesses to evaluate their recordkeeping practices to ensure they keep accurate tax receipts for future IRS audit initiatives targeting non-compliance. New jet audit campaigns may not be welcomed by those using corporate flights to “fly under the radar with their tax responsibilities.” (IRS). However, closing tax loopholes used by companies and wealthy individuals will benefit the US by increasing tax revenue. Id.