CLIENT ALERT: Entertainment Use of Aircraft - Final Regulations on Aircraft Disallowance ProvisionsAugust 28, 2012 By: The IRS recently published final regulations governing the implementation of the provisions of the American Jobs Creation Act of 2004 (the “2004 Act”) disallowing depreciation and operating expense deductions associated with use of corporate aircraft by company owners and executives for entertainment, recreation and amusement purposes. The final regulations will be effective for tax years beginning after August 1, 2012. The 2004 Act limits a taxpayer’s ability to deduct aircraft depreciation and operating expenses when the aircraft is used to provide transportation to certain “Specified Individuals” for entertainment, amusement, or recreational purposes. In 2005, the IRS issued Notice 2005-45 providing interim guidance for implementation of the 2004 Act. In 2007, the IRS published proposed regulations for implementation of the 2004 Act. The final regulations incorporate substantially all of the provisions of Notice 2005-45 and the proposed regulations without modification, with the exception of some clarifications and added computational examples. This Client Alert will focus on provisions of the final regulations that were not contained in Notice 2005-45 or the proposed regulations, as GKG Law has previously published various alerts and articles discussing the 2004 Act, Notice 2005-45 and the proposed regulations. The final regulations contain the following new provisions:
This provision in the final regulations has the effect of allowing a taxpayer to cause less than 100% of its depreciable basis in the aircraft to be subject to disallowance provisions. For example, an aircraft depreciable under a 7-year MACRS schedule (which would include all or part of eight different tax years, assuming a half-year or mid-quarter convention), would be depreciable under the ADS system over a 12-year (13 tax-year) straight line schedule. Under the provisions of the final regulations, after the conclusion of the eighth tax year (reflecting depreciation deductions under the 7-year MACRS schedule), there would be no further disallowance associated with depreciation deductions, and only eight out of the 13 years reflected on the 12-year straight line schedule would have been factored into the disallowance deductions. In the first eight years on a 12 year straight line schedule, the aggregate percentage subject to disallowance is 62.5%. The total aggregate amount of depreciation disallowed over such eight year period would therefore be, on average, 62.5% of the amount that would have been disallowed if the taxpayer had not elected to utilize ADS for purposes of calculating the disallowance.
If you have any questions concerning the final regulations or application of the disallowance rules generally, please do not hesitate to contact us. This Client Alert is a source of general information for its reader. The content of this Client Alert may not be construed as legal advice. No reader of this Client Alert should act on the information contained herein without consulting competent counsel to advise such reader regarding matters relating hereto. IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this client alert is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Entertainment Use of Aircraft - Final Regulations on Aircraft Disallowance Provisions |
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