The largest, most successful, or most geographically disperse companies often have a corporate jet to transport executives for business purposes for efficiency and safety reasons. Most permit guest travel on such trips, which for public companies is not quantified for proxy purposes. Many public and private companies also permit purely personal flights, often for safety concern purposes. Companies should consider acting now to support the executives’ not paying more in tax later, by using long-blessed special tax rates rather than much higher market rates.
The IRS requires imputing income on the Form W-2 for executives or Form 1099 for directors for personal travel, regardless of whether the same is reported on the Summary Compensation Tables as “all other income.” The IRS permits the use of the very favorable Standard Industry Fare Level (SIFL) rates, which can be a small fraction of the full costs of the trip incurred by the employer/company (SILF rates are published twice per year and are comprised of a cents-per-mile and terminal charge). However, if a company does not use these favorable rates on a timely basis, it will be forced to use much higher rates for computing taxable income on an amended return.
- Executive travels for business on a company provided aircraft. Occasionally, the executive travels for personal purposes and also brings a spouse and adult child on business trips. The SIFL imputed income for 2018 is $22,000 if reported timely on the 2018 Form W-2.
- If, in the example above, the amount is not reported timely on an original Form W-2, then the amount that will need to be reported will be $300,000.
The IRS has special rules for withholding on fringe benefits, including for personal travel on employer provided aircraft. Announcement 85-113 allows the income and Social Security taxes to be withheld as infrequently as once per year, rather than at the exact time the fringe benefit is provided, e.g. when the flight is taken. Furthermore, the company can choose to calculate the imputed income on a fiscal year basis of November 1 to November 1, which makes administration easier and allows time to submit for reporting on the Form W-2 issued in January.
Use of the IRS SIFL rates is very favorable, but requires attention and expertise in judging which travel by the executive is personal and also how to apply special rules to calculate the mileage that is personal for flights with multiple legs, foreign travel, and travel for safety purposes.
Take Away: Companies should begin the process of quantifying the amount of imputed income for Form W-2 purposes now, for all fringe benefits, especially travel on aircraft, so as to minimize the amount included. This also saves on the employer’s portion of required employment tax as well as being less of a tax burden to the executive.