Legislative Alert: American Jobs Creation Act of 2004
By: Galland, Kharasch, Greenberg, Fellman & Swirsky, P.C.

To: All Business Aviation Clients

From: Business Aviation Practice Group
Keith G. Swirsky Tel: 202-342-5251
Troy A. Rolf Tel: 952-449-8817
Rex E. Reese Tel: 202-342-5268
J. Craig Weller Tel: 202-342-5233
Stuart Schabes Tel: 443-394-6310

Re: American Jobs Creation Act of 2004

The American Jobs Creation Act of 2004 (the "Act"), signed into law by President Bush on October 22, 2004, overrides the Eighth Circuit's Sutherland Lumber decision by limiting a taxpayer's ability to deduct aircraft depreciation and operating expenses when the aircraft is used to provide transportation to certain owners and employees for entertainment, amusement, or recreational purposes. This law is intended to produce additional tax revenues and is, in effect, a back-door tax increase on companies that operate business aircraft.

Prior to October 22, 2004, provided that overall the aircraft is deemed to be ordinary, necessary and reasonable, if a company permitted its owners and employees to use the company's aircraft for entertainment, amusement, or recreational purposes when the aircraft was not otherwise being used for the company's business purposes, the company was entitled to fully depreciate the aircraft and to deduct all aircraft operating expenses provided only that the company imputed fringe benefit income to the owners and employees for such entertainment, amusement, or recreational use of the aircraft under the Standard Industry Fare Level (a.k.a. "SIFL") method or the fair charter value method.

Under the new law, however, deductions for depreciation and operating expenses incurred after October 22, 2004, that are attributable to flights provided to certain "Specified Individuals" for entertainment, amusement, or recreational purposes will be limited to the amount imputed to the "Specified Individuals" as fringe benefit income. The term "Specified Individuals" includes any person who is the direct or indirect owner of more that 10% of any class of equity security of the company, and any officer or director of the company. The Act does not limit the deduction permitted to companies for the expenses associated with operating personal, non-business flights for employees who are not "Specified Individuals".

The Act has a particularly harsh effect on Companies that have purchased a new aircraft in 2004, or will do so in 2005, and are entitled to bonus depreciation. In particular, in such cases the very large depreciation deduction allowed under the bonus rules will be subject to limitation if personal use by Specified Individuals occurs on or after October 22, 2004. This suggests careful monitoring of personal use during the bonus year.

If your company imputes income to owners and/or employees for entertainment, amusement, or recreational use of your company's aircraft, the Act could significantly limit your depreciation and operating expense deductions, and increase your company's income tax liability. Please contact Keith Swirsky, Troy Rolf, Rex Reese, or Craig Weller or Stuart Schabes for more details on how the Act will affect your company's income tax liability, and to discuss alternative aircraft operating structures that may mitigate the effects of the Act.
 

Copyright (c) 2001 Galland, Kharasch, Greenberg, Fellman & Swirsky, P.C., Washington, D.C.