Yes, it’s that time of year again to tell Uncle Sam about our previous year’s income and deductions so that an assessment of how much we owe him can be calculated on our annual tax return. What a pleasure! As if it’s not challenging enough in general, it can get even more difficult to claim aviation-related expenses, depreciation, and other deductions. So, it’s wise to be ready.
There are many guiding tax principles that are critical to successfully claiming aviation-related deductions. A fundamental principle at the core of every deduction is that the taxpayer bears the burden of proving entitlement to a claimed deduction. That means that there won’t necessarily be a presumption of legitimacy if the IRS questions the deduction. Rather, you must make the extra effort to document and justify a claimed deduction to be able to survive IRS scrutiny.
When claiming deductions in connection with an aviation-related business, you must be ready to prove that a business expense was paid, and you must be able to show that those expenses were ordinary and necessary to carrying on your trade or business. The expenses must be shown to be appropriate and helpful to the business and to be a normal, usual, or customary practice. This is usually determined by time, place, and circumstance—in other words, how does it fit in the context of your particular business? And if you intend to claim the wear and tear of property used in a trade or business (depreciation), you must be prepared to show what percentage of its use is for the trade and business, if not 100 percent, and be mindful of the applicable principles guiding your depreciation calculation.
To prove the business expense, it is important to maintain good records that will show the amount of the expense, that it was incurred in the taxable year, and that there is a business reason for the expense. In order for your records to be adequate, the IRS specifically requires that you provide sufficient evidence of (a) the amount of such expense or other item, (b) the time and place of the aviation travel, (c) the business purpose of the expense or other item, and (d) the business relationship of the persons or clients who were visited as a result of the travel. If you fail to comply with any of these four requirements, your deduction is subject to disallowance. In view of this, it’s generally best to capture that substantiation at the time of the expense rather than trying to reconstruct it at a later time. The degree of substantiation that you must keep may be case-specific, and some circumstances are more self-evident than others, which can help guide how much corroborating documentation to preserve. However, memories fade, and it is important to keep receipts and a good record of business purposes as you incur expenses. Attempting to reconstruct records is an uphill battle if the IRS comes knocking on your door for an audit.
There is always a devil in the details when dealing with Uncle Sam. It’s a good idea to be educated and get proper legal and tax advice before assuming certain tax advantages.