“I have an obligation to get you to your destination. You have an obligation to pay. What else is there? We don't need 24 pages of legalese.”
How a security program can cut flying costs
An oft-cited benefit of business jets is that they provide greater security than the airlines. This same benefit can reduce your taxes, too.
Understanding the tax advantage requires understanding the tax. Consider Mr. Big, the president of Big Co., who frequently uses the corporate Hawker 800XP to travel to company facilities and business meetings. He also uses the aircraft to fly to his vacation home in the Caribbean. Part of Mr. Big's deal with Big Co. is that those personal flights are free.
This creates a tax problem for Mr. Big. The IRS generally treats an executive's free travel on company aircraft for nonbusiness purposes as a taxable fringe benefit. So unless Mr. Big wants to pay fair value for his flights to the Caribbean, he has to include that value on his personal income tax return. But since he isn't being charged, how does he calculate the amount? The IRS gives him two choices: impute as income the cost to charter a Hawker 800XP for the trip or use the IRS's special valuation rule, called the Standard Industry Fare Level (SIFL), which provides a valuation based on first-class airfare.
To calculate the income under SIFL, you multiply the number of statute miles flown by the applicable SIFL rate, currently $0.2484 per mile. For a 500-mile flight, for example, the total would be $124.20. You then multiply that total by a factor that depends on the aircraft's maximum certified takeoff weight. In the case of Big Co.'s Hawker 800XP, the takeoff weight results in the highest multiplier: 400 percent. So Mr. Big's taxable income is $124.40 times 4, or about $498. But if Mr. Big were to have a bona fide security program in place that required him to use the company's Hawker for personal trips, the multiplier would be capped at 200 percent. So (ignoring a modest terminal charge and certain other factors), the income he would be obliged to recognize for tax purposes would be cut in half. Granted, the dollars in this example are small, but Mr. Big could save far more, because he takes many flights each year; they're typically much longer than this one; and he often travels with friends and family.
His natural reaction to this news would be: "Let's get my security program in place as soon as possible." But it's not that simple. Vague notions that Big Co.'s aircraft is safer than other modes of transportation or that Mr. Big's life might be in danger because he is, well, Mr. Big, don't satisfy IRS requirements. Examples of legitimate concerns given in the Treasury regulations include threat of death, kidnapping or serious bodily harm to Mr. Big and a recent history of violent terrorist activity where he travels. So if rebel groups in the vicinity of Mr. Big's Caribbean home are targeting Mr. Big or CEOs like him, he may have a bona fide security concern.
But a mere concern is also not sufficient. The IRS requires that Big Co. establish an "overall security program" designed to protect Mr. Big 24 hours a day. That doesn't mean his mom waits up for him at night. The IRS expects safeguards such as metal detectors, bulletproof cars, security fences and bodyguards. Any tax savings Mr. Big might realize will probably be more than offset by the cost of complying with these requirements.
The IRS offers another option, however: hire an independent consultant who creates a security study concluding that, although a full-blown security program isn't necessary, Mr. Big should always travel by company aircraft, even when he visits his vacation home. Here again, specific problems, such as threatening letters and people accosting him in public places, should form the basis of the security concern. The requirement to use the company aircraft is part of an effort to keep Mr. Big out of public places, such as busy airports, where he can be recognized and potentially endangered. The company must then consistently follow the study's recommendations.
Executives often hear about the tax advantages of security programs, but it should be evident from the foregoing that it's not easy to satisfy IRS requirements for such programs and that the benefits are limited to a reduction (albeit potentially significant) in the amount of income the executive must recognize under SIFL.
A final word. A public company's policy that a key executive should use the company jet for personal travel as a result of security concerns used to be grounds for not disclosing the cost of such flights (assuming the executive didn't pay for them) in public filings with the Securities and Exchange Commission. New SEC rules have closed this option.
Flying Under the Radar
One aspect of security available from business jets is anonymity, but it doesn't occur by accident. The FAA lists the registered owner of each business jet on the Web, and aircraft marketing services like Amstat show lessees and contact persons as well. For example, Amstat indicates that Gulfstream G450 S/N 4085, U.S. registration number N711SW, is operated by Steven Wynn, chairman and CEO of Wynn Resorts, and the listing includes address, phone, fax and e-mail information. No anonymity here. When N711SW glides by on a taxiway, anyone can find out who owns it and how to get in touch with him.
How can you prevent the world knowing that you own N711SW? It's helpful to use an owner trust, an FAA-sanctioned device that results in the owner of record showing up as Wells Fargo Bank, Wilmington Trust or another trust company. Similarly, you could lease the aircraft from GE Capital, Bank of America or another financial institution that offers aircraft operating leases. But even these devices don't hide the trustor, operator and contact persons. For example, a financing lease or security agreement (filed with the FAA) may have your name as a notice party for the lessee or operator.
If you're concerned about this information becoming public, you may want to
use the names and addresses of special-purpose entities and third parties (like a corporation service company or an attorney) to make it harder to identify who's involved. FAA registry counsel can also be helpful in limiting exposure of documents filed with the FAA.