Audit involving private plane.

[JoshinNC]

Does anyone have a client who is a pilot?

My client is a private pilot, and owns his own plane. He uses the plane for several ventures in which he participates, all legitimate. He lives in Raleigh, NC and works for a company in Charlotte, NC (approx. 150 miles one way). He must go to the company offices several times per month, and flies the plane to save time. He also runs a concrete resurfacing business, and did some out of state jobs in 2004 and 2005. He flew the plane to job locations for these jobs. He also owns rental property in Pennsylvania, and flies there 1 - 2 times per month to check on properties.

The problem is this:

On his 2004 and 2005 returns (both under review by NC) he did not depreciate the plane. However, he made "improvements" to the plane (new GPS unit, new dash, new electronics), which he expensed the cost of as repairs/maintenance on his Sch. C. I asked him "Can the plane fly without these items" and his answer was "Yes, but I wouldn't want to fly it without them, due to easier landing with the new equipment". I thought this was borderline between repairs and depreciable improvements. I told him we need an independent expert to verify that the "repairs" made the plane air worthy.

If we decide to go back, file an ammended return and remove the repairs from his Sch. C and depreciate both the plane and the improvements, to what do we charge the depreciation (Sch. C, Sch. E, 2210, or combination thereof based on use)?

I know this is a drawn out question and appreciate some help. Is there an IRS audit guide available for pilots that might help me?

[Bird Legs]

Depreciation

Would say the depreciation should be allocated among the various uses.
Question: Would the travel from home to job several times a month be considered
commute miles and not deductible?
As far as the additions to the plane, these should be considered as improvements,
and consequently, depreciated.

[BOB W]

Well.......

... before you think about writing off of ANY expense regarding the plane you need to look at total useage. Put the plane into the same view as an automobile, better yet a boat.. All planes are required to maintain a log book which will show each time it is used. You can start from there to determine business use.

Depreciation and maintence will be a hard pull when it comes to tax returns as the auditors will be looking at the plane as possible frivolous use (ordinary and necessary requirements) when it come to business expense. You may get stuck with actual cost of the business trips.

If the log book show substantial relationship to business you could get away with it, but just because the client claims it was a business trip doesn't make it so. Futher proof will be required.

[JoshinNC]

I am getting the log book

Client states that all flights were either to job locations or to Pennsylvania to check on properties. I will be reviewing next week. No flights were for pure pleasure, according to client. I agree with your thoughts Bob, especially since the auditor already raised this issue in their first meeting (I didn't prepare the returns in question and he went to his first audit meeting before calling me).

I also agree with you Bird, just wanted to see if anyone might think we could substantiate repairs.

[BOB W]

Client states that all flights were either to job locations or to Pennsylvania to check on properties. I will be reviewing next week. No flights were for pure pleasure, according to client. I agree with your thoughts Bob, especially since the auditor already raised this issue in their first meeting (I didn't prepare the returns in question and he went to his first audit meeting before calling me).

I also agree with you Bird, just wanted to see if anyone might think we could substantiate repairs.

His log book needs to be looked at for duration of time at the business related sites. Multiple days spent on single-trip could be a problem depending on the itiniary that can be established while there, primary purpose.

Multiple trips to check out his PA property will be a problem and it is definately personal, although they may allow one trip per year. But where would it be deductible? Not business related. Is this PA property rental income?

I'm sure passengers that went with him will be an issue as well. I don't know if a log book shows passangers.

[veritas]

How is checking

on properties a Sch C item? Wondering

[BOB W]

Glad to....

... see we are back on line..............

What is that "Go Advanced" button?

[JoshinNC]

Sorry, I didn't clarify

The Pennsylvania properties are rentals, and the only passenger would have been his wife, co-owner of properties.

So, I need to figure the hours related to each activity vs. the total flight hours and put on 4562 accordingly?

[BOB W]

As I said....

... before, duration of visit will be an issue to determine "primary purpose" for trip.

Added note> this evaluation would need to be computed for every year.. As far as PA is concerned, you said up to 2 trips per month were made. The auditor may not allow these unless you can prove repairs, maintence, improvements, (collection of rents? if behind in payments), etc......and any other reason that "requires" their personal attendence in PA, for each trip logged. If the auditor knows anything about pilots, he knows that pilots are required to maintain a certain amout of hours to fulfill their license requirments.

You must go to the auditor with airplane logs, personal appointment book/diary > with a multitude of supporting "written" substatiation. Written and verbal testomomy would be helpful. I'm just concerned about how you would overcome " Ordinary and Necessary" business expense.

Since he is structured as a sole proprietor, it lends him to being "small time". But profits always speak for themself.

[Snaggletooth]

Tough Sell

Josh, I don't think he is coming out of this thing unscathed. However, IRS doesn't question "ordinary and necessary" when it comes to lavish expenditures by large C corps. Of course they claim to, but it is amazing the degree of corporate waste and inefficiency which passes for "ordinary and necessary." Not so lenient, however, on smaller fish, and Bob W hints above that he might have helped himself if his operation was incorporated.

Rest assured, one of the most salient items will be an IRS declaration of a "tax home." Almost without question, this will end up being Charlotte. I don't necessarily agree this is fair, but there are too many arguments for, and not enough against unless you have something else up your sleeve. And IRS will salivate at the very thought of disallowing many of these trips. And their doctrine is "everyone must have a tax home." (although they CAN declare "no" tax home, thus a vagabond and nothing deductible)

He should be entitled to depreciation on the plane, which will help offset IRS adjustments. Allowability of the "repairs" may hinge on whether these costs are new or replacement items. If they are replacements, I would stick by my guns.

I would allocate the total operating cost of the plane between:
1. Trips to his employer. (How this guy could be an employee is beyond me, but
that is not within the scope of the conversation)
2. Trips to visit rental property as a fully allowed deduction for Schedule E.
3. Trips to visit paving job sites should be fully allowed for Schedule C.

Expenses associated with his wife will be "iffy" and depend on the auditor. For most audits with which I have first-hand knowledge, the simple fact of declaring spouses as "joint owners" is interpreted as a legal state of ownership rather than making spousal presence a "necessary" expense. Best defense is to show that husband and wife were BOTH required to conduct business. This might be accomplished by a requirement that a single signature on a document is insufficient. Flying the filly to Philly won't work if she goes directly from the airport to the mall.

If some of these trips are disallowed, go the extra mile and calculate cumulative business use. That way if he later disposes of the plane, it will fortify the case for not having to recapture the personal percentage of depreciation.