Part VI · Cases & Precedents · No. 05

Aircraft personal-use audits

On 21 February 2024 the IRS announced (IR-2024-46) that its Large Business and International Division would open dozens of examinations focused on personal use of business aircraft by large corporations, large partnerships and high-income taxpayers, funded under the Inflation Reduction Act. The examinations centre on whether aircraft costs are properly allocated between business and personal use — the §274 disallowance, imputed-income reporting, and the §280F business-use test.

Facts and the audit pattern

The recurring fact pattern: an operating business (often closely held) or a partnership owns or leases a business jet. Executives, owners and family members use it for both business and personal flights. The business deducts depreciation, fuel, crew, and operating costs. Examination typically looks at:

• Whether personal (including entertainment) flights have been identified and the related costs disallowed under §274.
• Whether personal flights have been reported as compensation or distributions to the individuals concerned (commonly valued under the SIFL formula of Treas. Reg. §1.61-21(g)).
• Whether contemporaneous records support business-use claims.
• Whether the qualified-business-use test of §280F (more than 50%) is met where accelerated or bonus depreciation was claimed.

Issue

Section 274(a), as amended by the Tax Cuts and Jobs Act of 2017, disallows deductions for entertainment, and §274(e)(2) as amended in 2004 limits the deduction for entertainment flights by “specified individuals” (officers, directors and 10% owners) to the amount treated as compensation. Under §280F, aircraft used for transportation is listed property; if qualified business use does not exceed 50%, the alternative depreciation system applies and previously claimed excess depreciation is recaptured. The allocation methods for disallowed costs are set out in Treas. Reg. §1.274-10.

Outcome / IRS positions

The IRS stated that it planned to open approximately four dozen examinations in the initial phase, using advanced analytics to select returns, and that more could follow depending on results. Commentary on the announcement noted that tax years from 2020 onward, when private aviation use rose sharply, were the likely focus. Recurring adjustment areas in this kind of examination:

• Disallowance of depreciation and operating costs allocable to personal and entertainment flights.
• Additional imputed compensation or distributions to the individuals who flew.
• Depreciation recapture where business use falls to 50% or below.
• Accuracy-related penalties where substantiation is weak.

Separately, aircraft management arrangements raise federal transportation excise questions under §4261; the Tax Cuts and Jobs Act added §4261(e)(5), which exempts amounts paid to an aircraft management services provider for management services related to an owner’s aircraft.

Reasoning

Substantiation is decisive. Logbooks, manifests, calendars and purpose codes for each passenger on each flight are what support an allocation. Sutherland Lumber-Southwest, Inc. v. Commissioner, 255 F.3d 495 (8th Cir. 2001), allowed a full deduction for executive vacation flights where the value had been reported as compensation; Congress responded in the American Jobs Creation Act of 2004 by limiting that exception for specified individuals, and Treasury implemented the limit in Treas. Reg. §1.274-10.

Significance

• Flight-by-flight documentation of passenger and purpose is the core control.
• Imputation of compensation for personal flights under the SIFL formula is routine practice in well-run flight departments; it does not by itself preserve the deduction for specified individuals’ entertainment flights.
• Bonus-depreciation decisions interact with the §280F business-use test. Under the One Big Beautiful Bill Act (Pub. L. 119-21), 100% bonus depreciation is restored permanently for qualifying property acquired after 19 January 2025, which increases the recapture exposure if business use later drops to 50% or below.

Subsequent treatment

The IRS has not, as of this review, published aggregate results of the 2024 aircraft examinations. Readers should check IRS newsroom releases and LB&I campaign listings for later developments.

Reviewed October 2026