Final Regulations: Aircraft Disallowance Provisions
Final regulations published by the IRS
The IRS recently published final regulations on the aircraft disallowance provisions which will be effective for years beginning after August 1, 2012. Substantially all of the provisions of the proposed regulations were left intact with the exception of some clarifications and added computational examples. Listed below is a summary of the differences in the final regulations:
- The final regulations did not provide a safe harbor charter rate that, if used, would result in zero disallowance; however, the regulations do authorize the IRS to adopt charter rates or other safe harbors in future published guidance.
- The proposed regulations allowed taxpayers to use straight line ADS depreciation for disallowance purposes while using MACRS accelerated depreciation for tax purposes. The final regulations provide several examples of these calculations, specifically illustrating that there would be no disallowed depreciation in a year after the aircraft has been fully depreciated for tax purposes using MACRS. In other words, disallowed depreciation cannot exceed the amount of tax depreciation of the aircraft in any year.
- The proposed regulations were silent on whether interest expense incurred to purchase a business aircraft was subject to disallowance. The final regulations make it clear that interest on debt secured by or properly allocable to an aircraft under the interest tracing rules is subject to disallowance.
- The proposed regulations were not specific as to how to allocate disallowance across various expense categories. The final regulations provide that disallowance is allocated pro rata across all direct operating costs of the aircraft including depreciation and includes examples.
- The proposed regulations left unanswered questions as to how to allocate the cost of deadhead flights (i.e., repositioning flights or flights with no passengers on board) to flights with passengers. The final regulations provide several specific examples showing how to allocate the cost of deadhead flights and compute disallowance.
- The final regulations maintain the proposed regulations definition of a taxpayer-provided aircraft to include any aircraft owned by, leased to, or chartered to any party related to the taxpayer, as determined under IRC §§267(b) or 707(b).
- The final regulations add a special rule for specified individuals on regularly scheduled flights of taxpayers that are commercial passenger airlines.
For additional information or questions, please contact:
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Deloitte Tax LLP
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