Tax Treatment of the Use of Employer-Provided Aircraft for Entertainment: Current Law and Issues for Congress

Publication Date: February 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

In general, business taxpayers are permitted to deduct all the ordinary and necessary expenses they incur in earning gross income, such as employee compensation (including fringe benefits). By contrast, expenses incurred by business taxpayers that are personal in nature or primarily for the entertainment, amusement, or recreation of employees (including senior executives) are generally not deductible.

Section 274(e)(2) of the Internal Revenue Code offers an exception to the rule denying deductions for expenses associated with the entertainment of employees. Specifically, business taxpayers may claim a deduction for the cost of goods, services, and facilities used in connection with the entertainment of employees and independent contractors, provided they treat the expenses as compensation in the case of employees or compensation for services rendered in the case of non-employees. Among the facilities covered by this rule are business aircraft. For most employees, the deduction cannot exceed the actual cost of using the facilities for entertainment. But in the case of certain senior executives, the deduction cannot exceed the total amount that business taxpayers report on their federal income tax returns as compensation for the executives' use of the facilities.

This report examines the current tax treatment of the personal use of employerprovided aircraft, describes proposed changes in this treatment being considered in the 109th Congress, and discusses policy issues raised by these proposals. It will not be updated.

The Senate-passed version of a tax reconciliation bill (H.R. 4297) contains two provisions that would modify the tax treatment of the use of employer-provided aircraft for the entertainment of employees and their friends and families. Section 455 of the measure would expand the current limitation on the deduction for expenses associated with the personal use of these aircraft to cover all employees and independent contractors; section 463 would require individuals who travel for their own entertainment on employer-provided aircraft to value those trips for tax purposes as the greater of the actual cost of the travel or its fair market value. These provisions are not included in the House-passed version of H.R. 4297.

Interest groups that would be affected by these proposed changes, led by the National Business Aviation Association, are concerned that the changes would act like a luxury tax on purchases of business aircraft and dampen demand for such planes and related services. They are pressing Congress to exclude them from any conference agreement over H.R. 4297 that may emerge.

Unlike the federal tax imposed on domestic purchases of expensive boats in the early 1990s, however, the proposed changes would not operate like a luxury tax on purchases of business aircraft, though they could raise the tax burden on individuals who travel for entertainment on employer-provided aircraft. In addition, trends in the demand for and use of such aircraft appear to be unaffected by the tax treatment of the use of employer-provided aircraft by employees for their own entertainment.