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IRS crackdown underlines vital importance of record keeping
Ryan DeMoor, head of aviation tax at MySky, explains why it is now, more than ever, important to keep careful records following the IRS crackdown on corporate jet tax compliance and suggests how AI tech can help.
MySky head of aviation tax Ryan DeMoor.

The IRS has announced a crackdown on corporate jet tax compliance, with a focus on personal and entertainment use of aircraft by corporations and high net worth individuals. While this is more likely the result of an industry image problem, as opposed to large numbers of business aviation users incorrectly deducting the costs of their personal travel against their tax bill, it underlines the importance of careful record keeping for business aviation users.

Current tax rules allow businesses to deduct the initial outlay and expense of maintaining an asset, such as a corporate jet, from taxable profits. However, this deduction must be proportionate to use of the jet for business purposes, with any entertainment travel not considered tax deductible.

Even before the IRS announcement, many businesses have chosen to comply with regulations by overspending on their tax bill to avoid legal issues and time-consuming processes involved in tracking their usage and accurately calculating their tax bill. The IRS allows users to calculate certain items in four different ways, while most corporations are only calculating this number one way, as the calculations are large and require a lot of data. This often results in overpayment of taxes.

There is a better way, however, which involves gaining clarity on the IRS announcement and recognising that the best response is to make effective use of the latest technologies. This can empower businesses to seamlessly track their business jet usage, pay the correct amount of tax and enhance overall efficiency and profitability. While the IRS is reporting on its new use of technology, companies can now employ similar tactics in response.

The IRS is set to begin with audits of dozens of corporations and partnerships, which will determine whether wider auditing is required. It will likely consider its most lucrative target to be bonus depreciation, which allows companies to deduct the full price of corporate aircraft from their taxable profits in the year that it was purchased.

While corporations that have invested in business aviation are fully aware of their responsibilities when it comes to bonus depreciation and record keeping, there are complexities that many struggle with. Such as a requirement to keep a record of every person on every flight, as well as why they are on the flight and their relationship to the business – executives, employees and owners all introduce different tax considerations.

When a business jet is flown for personal use, the company must declare the value of this travel as a form of taxable income, which typically involves calculating the Standard Industry Fare Level (SIFL) rate. On top of this imputed income, corporations need to ensure any allowable deductions are calculated in proportion to the business use, as opposed to entertainment use, of their aircraft. This means that individuals receiving the benefit will need to pay taxes on the value of the flight as defined by these regulations, and the company will lose the deduction for the remaining amount of expenses.

It’s because of this complexity that we can say with confidence that corporations falling foul of the IRS regulations are much more likely to have struggled with the intricacies of tax law than to have attempted to deliberately avoid their responsibilities. With the amounts involved in most flight departments compared to the overall size of the business, it’s hard to believe that companies are intentionally not complying with the rules.

The good news for these businesses is that there are AI solutions designed specifically to tackle this challenge. New technology means businesses can seamlessly automate calculations, including those relating to even the most challenging trips that involve a combination of business and personal use, in order to save time. And, given so many businesses overpay to avoid tackling complex calculations, these solutions could potentially even save them money.

Importantly, new AI-driven technologies can also support businesses beyond tax compliance, including automating everything from generating quotes, to gaining increased visibility of costs, to increasing procurement efficiency through better purchasing platforms.

As such, the IRS announcement can be a positive moment for businesses, acting as a reminder of the importance of harnessing the power of new and AI technologies. From ensuring compliance with complex tax rules, to operating more efficiently and profitably, now is the time to embrace technology; the IRS audit only serves to strengthen the case for this new approach.

MySky Tax supports customers with their tax compliance; the automated tax reporting solution for US flight departments can be integrated with a customer’s flight operations software, allowing it to use flight expense data before it’s invoiced to automatically file taxes according to business and personal use of a corporate-owned aircraft. For customers, this means tax reporting can now be faster, less labour-intensive, and highly accurate.

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