“"Many years ago, our company founder, Al Conklin, sold a new twin-engine business aircraft to a very successful entrepreneur. He had established a bit of a rapport with the individual and, after the sale, asked him straight out, 'How can you justify the cost of this airplane?' His reply? 'What is the cost of a divorce?'"–David Wyndham, president, Conklin & de Decker”
Paying for flights on the corporate jet
One of the biggest challenges posed by FAA regulations is how to pay for a flight on a non-commercial aircraft.
The FAA imposes stringent requirements with regard to charging for air transportation, even if this simply amounts to sharing the costs of a flight. Any payment or reimbursement-indeed any kind of compensation-for transportation on an aircraft generally renders a flight "commercial" for FAA purposes, in which case the aircraft operator must have a commercial certificate and manage the flight under Part 135 rules (or worse, under Part 125 or 121 rules, which apply to very large aircraft and the airlines).
The FAA set down its position in 1993 in response to an inquiry on behalf of Charles Schwab & Co. (The FAA response, which is famous among aviation attorneys, has thus come to be known as the "Schwab opinion.") The Schwab company, which operated a business jet under the noncommercial rules of Part 91, asked the FAA whether it could charge its founder for his personal use of the aircraft, advancing several arguments for why this should be permitted, including the firm's desire to keep in touch with him. Predictably, the FAA took exception: "It may very well be that the Company wants to maintain prompt communications with Mr. Schwab when he is on pleasure trips," wrote the agency. "That desire, however, does not alter the fact that he is traveling for pleasure...Such carriage is not within the scope of or incidental to the company's business."
The difficulties of navigating FAA prohibitions on paying for flights can be especially frustrating when other federal agencies-the IRS or the Securities and Exchange Commission, for example-impose dire consequences if employees or executives fly for free. When employees get free flights on corporate aircraft, they have taxable income that in the case of public companies may give rise to an SEC reporting obligation. In addition, under recent rules, companies may forfeit tax deductions to the extent that costs attributable to non-business flights exceed what employees pay for the flights (or recognize as income). Thus, the more the executive can pay, the more the company can deduct. But as the FAA observed in the Schwab opinion, "application of aviation safety regulations is not dependent on, or affected by, what may be consistent with IRS regulations."
Opportunities to mitigate or eliminate IRS or SEC difficulties by paying for the flights are hardly voluminous. Unless you can operate under Part 135, the best bet is usually a time-sharing agreement, which permits the executive to pay two times the fuel cost of the flight, plus certain incidental expenses. In addition to requiring a written agreement that must usually be filed with the FAA, the permissible charges are less than the fully allocated cost of the flight and often don't satisfy the company's or the executive's regulatory or business objectives.
As a result, many companies are putting their aircraft on Part 135 certificates-often an expensive proposition by itself-and allowing their executives to use the airplane for personal trips at standard charter rates (and with standard charter taxes).
In an attempt to ameliorate this situation, the National Business Aviation Association wrote to the FAA earlier this year and requested that it recognize that "in certain limited circumstances," a company may determine that it is within the scope of its business for certain individuals to use its aircraft for personal purposes. Although the arguments made by the NBAA in the letter are reminiscent of some of those made on behalf of Schwab (such as the need to remain in constant communication), they also rely on the need for key employees to depart and return from personal trips on a moment's notice in an increasingly global business environment. Essentially, the NBAA's argument is that, under these circumstances, use of the corporate aircraft for personal flights by key executives may be within the scope of the company's business, in which case reimbursements of flight costs by the executives should not be prohibited. In other words, rather than seeking to overturn the Schwab opinion, the NBAA is asking the FAA to concede that personal and business use needn't be mutually exclusive.
The NBAA wisely refrains from dictating to the FAA exactly how to provide relief, but it does make several important suggestions. First, there must be a way to distinguish key company personnel-employees and officers who should be allowed to pay for non-business flights as within the scope of the company's business-from everyone else. The NBAA helpfully points to the concept of "specified individuals," which is deployed by both the IRS and SEC to draw comparable distinctions, and generally refers to directors, specific high-level officers and those who own more than 10 percent of the company. Second, the NBAA suggests that the company (the board of directors, for example) make a determination that use of the aircraft by a certain "specified individual" is within the scope of its business even when the trip is personal.
As this article went to press, the FAA reported that it has "tentatively determined" that a company may be reimbursed for routine travel by its high-level employees under certain circumstances. Stay tuned for further updates.