June 28, 2018
With passage of the Tax Cuts and Jobs Act, NBAA is urging members to carefully review provisions that impact business aviation as they conduct tax planning.
Last year, as Congress debated tax reform, NBAA successfully advocated for several provisions that are having a positive impact, such as the extension of 100-percent bonus depreciation to used property. However, as the IRS and Department of the Treasury are still working on guidance to clarify ambiguities in the law, it is critical to consult with qualified tax and legal advisors.
NBAA’s Tax Committee has been reviewing the law and provided input on the association’s June 13 letter to the IRS and Department of the Treasury seeking guidance on several issues.
While NBAA will work to obtain government guidance as quickly as possible, federal regulators have their hands full with many far-reaching tax reform issues that require clarification, such as the interest expense limitation and pass-through deductions.
The tax reform provision extending 100-percent bonus depreciation to used property is a prime example of where clarification is needed. To be eligible for bonus depreciation, the taxpayer cannot have “used” the property any time before acquisition, but that raises additional questions. For example, will the IRS view a charter flight on the aircraft or taking it for a demonstration flight as a disqualifying use?
“The questions surrounding application of bonus depreciation to used aircraft are just one example of an issue on which guidance is needed to address real-world issues faced by taxpayers,” said John Hoover, a special counsel with Cooley LLP who led the Tax Committee’s guidance request effort.
Hoover also noted there are questions surrounding the Sept. 28, 2017, cutoff date for bonus depreciation. For example, if a taxpayer signed a contract to build a new airplane before Sept. 28, 2017, but construction of the aircraft did not actually begin until after that date, should it qualify for bonus depreciation?
“For bonus depreciation purposes, the contract to build an aircraft should not necessarily be viewed as a contract to purchase, and while we need to await guidance, our view is that the scenario described above ought to qualify for bonus,” explained Hoover.
Another source of ambiguity in the tax law arises from provisions disallowing employer deductions for business entertainment and commuting expenses. On the entertainment issue, Hoover said, “The existing regulations don’t talk about a trip where the passenger engages in multiple activities.”
Hoover said the IRS should adopt a test that asks: what is the primary purpose for taking the trip? But he noted that although NBAA advocates for that test, the IRS still needs to make a determination.
Another scenario that illustrates the need for clarification is when a company hosts a hospitality suite at a convention, which is held in a business setting. Prior to passage of tax reform, the expenses would have been deductible. Under post-tax reform law, the expenses also ought to be deductible, since the purpose is clearly for guests to network and conduct business, not to be entertained, suggested Hoover.
“Just because an activity met the exceptions for business entertainment, doesn’t mean the activity is entertainment,” Hoover explained.
On the commuting expense disallowance, NBAA wants to stress several points with the IRS and Treasury. One is that if an employer imputes commuting costs as a fringe benefit to the employee – which the employer reports on the employee’s W-2 form – those commuting costs should still be deductible by the employer.
Another point concerns an exception to the commuting expense disallowance when an employer provides commuting benefits for employee safety.
“There is already guidance in the Treasury Regulations on how to establish that a valid business-oriented security concern exists for an employee, and that standard should be used as a safe harbor for the commuting disallowance,” Hoover said.
Hoover added that the commuting disallowance should only apply to employees and not independent contractors or partners.