When considering how to allocate the costs of an aircraft, owners must be aware of both tax and FAA requirements. Satisfying your tax and business goals, without addressing the FAA requirements, may result in compliance issues.
The FAA’s General Rule: No Charges for Part 91 Flights
The FAA’s general rule is that no compensation may be received for Part 91 flights, and they construe compensation broadly to include actual monetary charges, contributions by owners, intercompany allocations, and even goodwill! If the revenue of the company operating the aircraft is not sufficient to cover the costs of the aircraft, then it is likely the FAA will find “compensation” being paid, no matter how it is characterized.
Exceptions to the General Rule
There are several exceptions to the FAA’s general rule on compensation, many of which are contained in 14 C.F.R. 91.501. For companies seeking to allocate costs within their corporate structure, the exception contained in 91.501(b)(5) is often a good fit. It allows companies operating certain aircraft to:
- Carry officials, employees, guests, and property of the company, or of the company’s parent or subsidiary, or another subsidiary of the company’s parent;
- When that carriage is within the scope of, and incidental to, the business of the company operating the aircraft; and
- Make a charge not exceeding the costs of owning, operating, and maintaining the aircraft for that carriage.
While this exception may work well in certain corporate structures, there are numerous FAA interpretations that restrict its applicability to certain types of flights and structures. A careful review of the facts is necessary before relying on this exception to allocate the costs of an aircraft.
The FAA and IRS Having Differing Views
The FAA and IRS often have a different perspective on aircraft ownership and operational structures, and neither agency is bound by the other’s view. For example, a corporate structure with multiple corporate entities may be viewed by the IRS as a single entity for income tax purposes, but the FAA would still treat each company in the structure as a separate entity. In that structure cost allocation between the entities may be disregarded for federal income tax purposes, but don’t make the mistake of assuming that allocation is permissible under FAA requirements. It would only be permissible if it met the specific requirements of 91.501(b)(5), or another exception to the general rule of no compensation.
Discussing your plans with an experienced business aviation attorney will help ensure that you don’t create compliance issues when trying to achieve your tax and business goals.
Lori N. McGee is a partner with the law firm of Jetstream Aviation Law and counsels clients on the acquisition, financing and operation of corporate jets operated under Part 91 and Part 135 of the Federal Aviation Regulations. Jetstream Aviation Law can be found at www.JetstreamLaw.com.
The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.