Deducting corporate aircraft entertainment travel.

Notice 2005-45 clarifies the post-American Jobs Creation Act of 2004 (AJCA) tax treatment of the personal use of corporate aircraft for entertainment travel. For such use after Oct. 22, 2004, the employer's deduction cannot exceed the amount the traveling employee includes in income.

Background: Prior to the AJCA, if an employee used a business aircraft for entertainment travel, the employer could deduct the cost of providing the flight if the employee properly reported the flight's value as additional income. While the employer generally deducted many thousands of dollars for providing the flight, the employee would include in income only a relatively small amount, calculated under the Department of Transportation's standard industry fare levels formula.

New law: Under the AJCA, the business's deduction cannot exceed the amount the executive takes into income for entertainment use of the aircraft. The Sec. 274(e)(2) and (9) exceptions to Sec. 274(a)'s general disallowance rule apply in the case of a "specified individual" only "to the extent that the expenses do not exceed" those treated as compensation to the specified individual (e.g., officer, director or 10%-or-more owner of a public or private company).

Notice 2005-45: The notice defines "entertainment use" in the same way as does the statute--for amusement or recreational activity (e.g., traveling to a sporting event or vacation destination). If the trip's purpose is business-related entertainment, the AJCA's limit applies to the executive, too.