Company Aircraft

[Harvey Lucas]

Corporation XYZ leases an aircraft.

Keeping numbers simple for ease of discussion, in 2011 it paid lease expenses of 180,000, pilot wage expense of 80,000, fuel expense of 20,000, insurance expense of 30,000, maintenence expense of 20,000, for total operating expense of 330,000

Based on "SIFL" calculations, my client Joe, majority shareholder and CEO, must include an additional 25,000 of income on his W2 form because of his personal use of that Aircraft. This use was "Personal Non Entertainment"

His regular W2 Gross Wage for the year is 400,000,

His net wage is 400,000 less required tax witholdings.

ie, the company writes checks for his wages, and checks for all the various taxes, etc.

So how do I account for this extra 25,000 of extra W2 income??

First step is obvious, I add 25,000 to his Gross wage, so that now his Gross Wage on his W2 is 425,000...

But what do I do at the Corporation level?

Assuming I put all the Aircraft expenses into one expense catagory, I list "Aircraft Expense at 330,000..

My dilema is the 940/941,W2,W3 reporting and the overall deduction at the Corporation level.

Assuming Gross wage of all other employee's is 800,000, the Corporation deducts Gross wages of 800,000, plus 400,000, plus 25,000, grand total of 1,225,000

So how do I account for this extra 25,000 of reported wages at the Coproration level? The Corp did not pay for it in cash, so now my balance sheet is off by 25,000??

I am assuming that the answer is simple and right in front of my face but I cant seem to find any examples of how to do this even among all the intricate writings of avialtion tax and law experts.

Logic tells me it is handled one of two ways:

First way is that the 25,000 is a phantom deductible expense of the Corporation and reportable by the employee as income, and as such I make an adjustment on the Corporation Balance Sheet equity section under possibly "contributed Capital" (zero basis) to balance the balance sheet????

The second way is that I content that the 25,000 is really made up of portions of the 330,000 total Aircraft expense, so that I report "Aircraft Expense" at 305,000, and report Gross wages at 1,225,000 so that my 1120S/940/941/W2/W3 all match with respect to gross wages..

The first way gives me a larger overall deduction at the Corporation level, which would be nice, but it doen't seem quite right.

However, in all my various readings it seems to infere that this is how it is done.

Any help here will be most definately appreciated.

Thanks you all in advance for your help.

Sincerely,

Harvey Lucas

[Bees Knees]

From page 10 of the 2010 Form 1120 instructions:

If the corporation provided taxable
fringe benefits to its employees, such as
personal use of a car, do not deduct as
wages the amount allocated for
depreciation and other expenses claimed
on lines 20 and 26.

In other words, any expense of the corporation that is considered a taxable fringe benefit of an employee and thus added to the employee's taxable cash wages on the W-2 is NOT deducted as wages paid, but rather, deducted on the applicable line of the return for what the expense is for, such as line 20 for depreciation and line 26 for other expenses.

So in your case, deduct all costs for the aircraft as aircraft expenses on the applicable line of the return for each expense and ignore the fact that a portion of those expenses are being added to the W-2 of certain employees.

There does not seem to be any requirement that says you have to reconcile the difference between taxable wages reported on the return with taxable wages reported on the W-2, W-3, Form 941, etc., although I would make a reconciliation worksheet for the taxpayer and tax preparer copies of the return so that you can see which lines on the tax return make up the gross taxable wages reported on the W-2.

[Harvey Lucas]

Thank You

Thank you Bees.

That makes perfect sense.

It is odd how you can read through a dozen "narratives" about how a particular thing works, but unless you have a specific example it is very often ambiguos.

The old saying, "a picture is worth a thousand words" is right on the money, however, regarding tax laws and rules the saying should be "an example is worth thousands of words"

Examples with numbers say it all, words tend to be ambiguos and tend to confuse because everyone interprets the words a little diferently..

Anyway, thanks again.

Harvey Lucas