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Entertainment Cost Disallowance

The Internal Revenue Service has specific rules for tracking and reporting business use of aircraft. States also have specific rules that must be followed when deferring or reducing sales and use taxes. Failure to follow the reporting rules can lead to loss of deductions and unnecessary tax expense. FTS is designed to assist with the required documentation and reporting.

IRS rules require companies to disallow aircraft costs, expenses, and depreciation from entertainment flights, called Entertainment Cost Disallowance (reported as company deductions). Reporting requires tracking every passenger on every flight leg to classify if traveling for:

  • Entertainment purposes
  • Business
  • Non-business non-entertainment

Final IRS regulations issued August 1, 2012 affirm the same four methods for allocation of costs associated for entertainment flights:

  • Occupied seat hours
  • Occupied seat miles
  • Flight-by-flight hours
  • Flight-by-flight miles

The taxpayer is allowed to use the calculation method that results in the lowest tax. Entertainment use percentage is used to reduce aircraft costs, expenses and depreciation on the company's tax return.

Final Regulations state that all of the costs of the entertainment flights are subject to the disallowance, including:

  • Fixed costs
  • Variable costs
  • Costs indirectly connected to the flight
  • Interest
  • Depreciation

Flight Tax Systems (FTS) is a web-based software application developed by Wolcott & Associates, P.A. to assist owners, operators and tax professionals with tracking the tax-related activities of their aircraft. FTS prepares company entertainment cost disallowance calculations and reports.