s is the case with governance of any oper-ating business, owners of business aircraftmust maintain adequate records to sup-port the tax treatment of their income andloss with respect to their involvement

with Business Aviation. Those records must beretained for an adequate amount of time in theevent they are needed in connection with anincome tax audit.

Additionally, Directors should be aware of uniquerecord keeping requirements pertaining to use ofbusiness aircraft.

As a general rule, business aircraft owners shouldretain tax records for a minimum of six years fol-lowing the date that the owner files the income taxreturn to which those records relate.

The typical limitations period prohibits the IRSfrom challenging the contents of a tax return morethan three years after it is filed. In certain instances,such as where income is understated by a substan-tial amount, this time period can be expanded to sixyears. Of course, there are exceptions to this rule,such as where a taxpayer engages in fraud or failsto file a tax return. In those situations, there is noapplicable statute of limitations.

However, assuming that those exceptions do notapply, following the general six year rule should beadequate.

ADDITIONAL RULES OF THUMBIn addition to these “rule of thumb” recommenda-tions, business aircraft owners should always keepall records relating to an aircraft, including thosepertaining to the purchase and sale of the aircraft,until six years after the owner sells or otherwisedisposes of the property. The purpose for suchretention is to ensure that the owner can support

the amount of any gain or loss reported as a resultof the sale of its aircraft and any concomitant taxbasis adjustments to the aircraft that affect theamount of such gain or loss.

Business aircraft owners also face certain unique taxrecord keeping requirements. For example, theymust create and retain records relating to SIFL(Standard Industry Fare Level) income inclusion

If and when the IRS demands an audit, strict adherenceto record keeping will be worth its weight in gold, notesattorney Chris Younger.

A

IRS Record Keeping Requirements

Chris Younger is a partner at GKGLaw, P.C. practicing in the firm’sBusiness Aircraft Group. He focuseshis legal practice on business aircrafttransactions as well as issues relat-ing to federal and state taxation andregulation of business aircraft own-ership and operations. Mr. Youngercan be contacted atcyounger@gkglaw.com

60 WORLD AIRCRAFT SALES MAGAZINE – January 2012 Aircraft Index see Page 4www.AvBuyer.com

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BUSINESS AVIATION AND THE BOARDROOM

62 WORLD AIRCRAFT SALES MAGAZINE – January 2012 Aircraft Index see Page 4www.AvBuyer.com

amounts and personal loss deduction limitations.(SIFL is an amount specified by the federal govern-ment to determine the value of personal travel onthe company aircraft.)

These records include items that must be createdcontemporaneously with the flights to which theyrelate. If a business aircraft owner fails to createsuch records contemporaneously with the relevantflight, the IRS may have a basis to question or chal-lenge the veracity of the information contained inthose records during an audit by, for example,arguing that a business aircraft owner createdrecords merely to support its tax position in anaudit.

AIRCRAFT MANAGEMENT COMPANIESA business aircraft owner should be able to accessflight, financial and tax records relating to owner-ship and operation of its aircraft. If a business air-craft owner hires a management company to main-tain certain records (e.g., flight logs, passengermanifests, flight related activity and maintenancecosts), the owner should ensure that its agreementwith the management company gives it the right toaccess these records as necessary even after the ter-mination of the agreement between the owner and

management company. Among the recommendedprovisions to guarantee access to such recordswould be a covenant by the management companythat it will retain those records for an adequateperiod of time after their creation.

A business aircraft owner should also ensure thatcertain records are created in a manner that willenable the owner to effectively utilize them in theevent of a tax audit. This is especially true forrecords that are used as back-up to support SIFLincome inclusion amounts and deduction limita-tions resulting from use of the aircraft for personalentertainment.

Since the process can be complex, a business air-craft owner should consider retaining a qualifiedaviation tax consultant who has expertise in collect-ing and organizing the information needed to cor-rectly calculate these items. Seeking legal counselregarding record keeping will ensure that ownersof business aircraft are prepared in the event of anIRS audit.

Do you have any questions or opinions on the above topic?Get it answered/published in World Aircraft Sales Magazine.Email feedback to: Jack@avbuyer.com

BUSINESS AVIATION AND THE BOARDROOM

“A businessaircraft owner

should alsoensure that

certain recordsare created in a

manner thatwill enable the

owner toeffectively

utilize them inthe event of a

tax audit.”

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