How a security program can cut flying costs
By Jeff Wieand - April 1, 2010
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.
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