“"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 to fly the company jet
The Federal Aviation Administration recently changed the rules that determine when executives may pay for flights on their company aircraft.
You may be wondering why executives would even want to do that, but there are at least a few good reasons. They might want to avoid taxable income or disclosure in public company filings of an unwanted perquisite or they may want to improve the company’s tax position. Or they might simply think paying is the right thing to do.
The FAA, however, generally prohibits passengers from paying for flights on airplanes operated under its non-commercial Part 91 regulations. This precludes a company official from reimbursing his employer for out-of-pocket costs of the trip.
But there have long been exceptions. Within limits, FAA regulations let you pay for demo flights and so-called “time shares.” They also let you pay for flights that are–here’s the magic language–“within the scope of and incidental to the business of the company, other than transportation by air.” For example, a company official could pay to use the corporate jet to fly to his own firm’s board of directors meeting, but not generally to an unrelated corporation’s board meeting. Alternatively, you could put your aircraft on a Part 135 commercial certificate and charge for flights operated under its regulations.
In March 2010, Mike Nichols at the National Business Aviation Association asked the FAA to “recognize that in certain limited circumstances, a company may determine it is within the scope of the company’s business for certain individuals to use the company aircraft when traveling on vacation or for pleasure or personal purposes.” The NBAA argued that it was beneficial for the company to remain in constant contact with executives and to permit them to travel in a manner that is conducive to its business. And it asserted that it is much easier to maintain contact with executives, and for the executives to work productively, when they travel on a business jet rather than on an airliner. Nevertheless, in the age of BlackBerries and Gogo, the FAA rejected this argument on the grounds of “advances in communication technology.”
A second NBAA argument proved more successful, however. The association suggested that use of corporate aircraft made company executives more immediately available, because flying privately made it much easier to postpone or cancel a trip or to recall an executive early. The FAA agreed.
What’s the best way for a company to implement the new exception? First, note that it applies only to “high-level employees or officials.” The FAA refers to “an individual whose position merits such a high level of company interference into his or her personal plans.” To a large extent, this requirement is self-policing, since the only people likely to be using the company jet for personal travel–let alone paying for it–are prominent and well-heeled executives. However, declining to adopt a “blanket description” such as “specified individuals” employed by the SEC and IRS, the FAA suggests that the board of directors or an equivalent governing body maintain and regularly update a list of individuals “whose position with the company requires him or her to routinely change travel plans within a short time period.”
Second, the governing body should develop a policy–I would strongly suggest a written policy reviewed by aviation counsel–designed to anticipate the kind of circumstances that might qualify for flight expense reimbursement by the company executive. Examples provided by the FAA of trips where reimbursement would ordinarily not be appropriate include weddings, funerals and urgent medical treatment. In other words, the FAA doubts that you will miss your daughter’s wedding to return to the company for business reasons except under the most drastic of circumstances.
Third, each time the company permits an executive to pay for a flight, it should make a written determination that the circumstances require the exception. Presumably, unlike the list of individuals, this determination need not be made by the governing body on each occasion, but could be handled by a company executive following a policy established by the governing body. Written records of these determinations (along with the policy and list of individuals) should be retained for possible review by the FAA.
How much can the executive pay? The reference point in the FAA regulations is FAR 91.501(b)(5), which permits reimbursement of the cost of “owning, operating and maintaining the airplane.” This is a broad standard indeed and could include, say, depreciation and maintenance expense, quite apart from whether the executive will have any appetite for assuming responsibility for such costs. One thing is certain: the FAA refers repeatedly to “reimbursement.” In no event should the company receive any payment that could be construed as profit. The calculation of reimbursements should be part of the company’s written policy. Reimbursements will also be subject to the federal transportation excise tax.
The new FAA ruling represents good news for companies and their top executives. The agency did the right thing here.
Jeff Wieand welcomes comments and suggestions at: email@example.com