Paying for flights on the corporate jet
By Jeff Wieand - August 1, 2010
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.
Share This Article With Others