Unintended Consequences of CAPPS II

"Hank Rausch" wrote in message
m...
|
| However, in the interim, I wonder if this isn't actually an
| unintended benefit to those of us in general aviation. Those of us who
| use our planes for business are probably aware of the "reasonable man"
| litmus test for deduction of flying expenses where commercial air is a
| viable option--e.g, it doesn't pass the "reasonable man" test to spend
| $2400 flying from NY to LA in a small plane when a commercial ticket
| could have been purchased for a fraction of that. The IRS would,
| rightfully in my opinion, disallow that deduction. Tax books cite
| case law instances to show what would be considered reasonable and
| what would not.

I practiced as a CPA for thirty years before retiring a few years ago. I
would like to see such cases. I have never seen the IRS disallow any
deduction solely because it was not the cheapest way to go. There is no
"reasonable man" test in tax law that I know of except in certain matters
having to do with the compensation of corporate officers. If you want to
cover your office building in gold leaf you can do it and amortize the cost
with the building, even though bare cinder block might be much cheaper. In
fact, gold plated buildings were quite the fad a few years ago.

It has been well established that the cost of business travel in private
aircraft is deductible, even if that business travel is in a Gulfstream V.
If you want to do all your business travel by camel caravan with a troop of
harem slaves and eunuchs the IRS is not going to question it. (Shoot, Barnum
and Bailey has been doing essentially that for centuries.)

One of the most common tax questions about business travel in private
aircraft is what the standard deduction per mile is. The answer is that you
should deduct your actual costs, since the cost per mile varies too widely
among various types of aircraft to make any standard mileage cost a useable
figure.

Where you might run into trouble (and probably the source of your
"reasonable man" litmus test) is if the IRS decides that the primary reason
for your trip was not for business purposes. If they think that some
incidental business purpose was being used just as an excuse for a personal
tour around the country in your private airplane, the IRS is going to say
that you are not allowed to deduct your vacation.

|
| It occurs to me that the invasiveness of CAPPS II and the general
| inconvenience of commercial air travel in this country, post-911, has
| signficantly altered the balance in this "reasonable man" calculation.
| In other words, it is easier to make a case, in general, to use one's
| plane for a legitimate business deduction, even when the cost of doing
| so is significantly higher than a commercial ticket.

Since the cost difference between private and commercial travel was never an
issue, then the rest of your argument does not follow. Tax law has pretty
well established that you are free to mismanage your business pretty much as
you please and still deduct your losses.

Business aviation has gotten a big boost, though, from both new tax laws and
from new security. In fact, I cannot imagine a situation where it is now
more cost effective to travel by airline than it is by corporate airplane. I
am amazed that there are any business travelers on the airlines at all,
given the current circumstances. I can only attribute it to massive
ignorance of the advantages of avoiding the airlines and to concern about
the safety of small planes. Even very small businesses can reap enormous tax
benefits while turning a Cessna 172 into a profit center.

The safety issue can be at least partially dealt with by taking various
measures. You should not allow all the top officers to travel on the same
plane, for example -- and that goes for airline travel as well. I most
commonly see the CEO and treasurer on one jet, with a senior v.p. or
president and the secretary on another. The board simply cannot risk
decapitating the entire company in a single accident. Small companies cannot
afford to do that, of course, but that is what corporate life insurance is
supposed to be for.

Your analysis is right on CJ...

Concerning whoever opined that the irs will tell the taxpayer that he has to
take the cheapest route, this is a matter of settled case law - when Judge
Learned Hand published a finding that says that the taxpayer does not have a
legal duty to arrange his affairs for the financial benefit of the
government...
denny

"Dennis O'Connor" wrote in message ...
Your analysis is right on CJ...

Concerning whoever opined that the irs will tell the taxpayer that he has to
take the cheapest route, this is a matter of settled case law - when Judge
Learned Hand published a finding that says that the taxpayer does not have a
legal duty to arrange his affairs for the financial benefit of the
government...
denny

Denny,

Here is a relevant passage from tax law:

Companies can deduct travel expenses while employees are working away
from home in the pursuit of a trade or business as ordinary and
necessary expenses under IRC section 162(a). Treasury regulations
section 1.162-2 explicitly includes "travel fares" that are
reasonable, necessary and directly attributable to business as valid
trade or business expenses. The law considers an expense ordinary if
it is "common and accepted," comparing the taxpayer with "the group,
the community, of which he is a part" (Welch v. Helvering, 290 US 111,
114, 54 Sup. Ct. 8, 78, 1933). In Noyce v. Commissioner (97 TC no. 46,
97 TC 670 (1991)), the court said the taxpayer incurred ordinary
expenses when there was a clear business advantage and when the cost
of replicating the travel schedule and the time savings via commercial
charter would have exceeded the costs of operating a company aircraft.

NECESSARY EXPENSES

Because personal aircraft had for so long been viewed as a lavish
business perk, the courts require taxpayers to prove that aircraft
they claim as business deductions are actually necessary for their
business and not just for the owner's benefit.

Don't wander off in the weeds Hank... I have run my own businesses all my
life, and my accountant can cite chapter and verse of tax court rulings, and
yes I expense my airplane for those trips that are business... If you are
disguising vacation, personal, and fun travel, as a business expense -
regardless of the mode of transport airplane/boat/car/train/oxcart - it will
be denied when discovered, and rightly so...

That is not what Judge Hand ruled on... He ruled that the federal
government does not have the power to force you to arrange your affairs to
maximize the amount the government can tax you... By corollary, the
government cannot increase your tax burden because you choose to buy your
copy machine toner from a distributor that is 10% more than some other
distributor, or force you to ship your employees by Greyhound because they
are cheaper than the airlines... Such a ruling would create chaos for the
business community, and bring down the current tax law in the end - not
necessarily a bad thing...

Dow Chemical Corporation's flight department is just up the road from me...
I am on speaking terms with a number of their senior pilots and
executives... I have talked about this issue with them... It costs them more
to operate the airplanes than it would to ship their people by commercial
coach fares, especially given the volume discounts they could arrange, BUT
their people, many of whom fly 2 or 3 days a week continuously, would lose
far more hours waiting on airline schedules, etc... Their people are more
productive because Dow runs a tight schedule with it's own airplanes... The
irs has not even tried to challenge Dow's use of it's planes... Needless to
say, Dow has iron clad rules for who gets on their airplanes... Momma and
the kids don't go to Orlando with you...
denny

"Hank Rausch" wrote in Here is a relevant
passage from tax law:

"Dennis O'Connor" wrote in message
...
| Don't wander off in the weeds Hank... I have run my own businesses all my
| life, and my accountant can cite chapter and verse of tax court rulings,
and
| yes I expense my airplane for those trips that are business... If you are
| disguising vacation, personal, and fun travel, as a business expense -
| regardless of the mode of transport airplane/boat/car/train/oxcart - it
will
| be denied when discovered, and rightly so...
|

Exactly. As long as you are really using the airplane for business travel,
it is deductible. Start turning that business trip into a vacation by
visiting friends and relatives, taking non-employees along, visiting
resorts, etc., then you start running afoul of the rules.

Travel by personal aircraft is accepted as ordinary and necessary. Travel
from New York to Chicago via Orlando is not.