Sole proprietor that owns an aircraft may use primary purpose test to determine whether expenses for use of aircraft by sole proprietor are deductible
IRS publicly released a Chief Counsel memorandum
The IRS today publicly released a Chief Counsel memorandum* concluding that a sole proprietor that owns an aircraft (either directly or indirectly through a disregarded entity) may use the primary purpose test under Reg. section 1.162-2(b)(1) to determine whether expenses for use of the aircraft by the sole proprietor are deductible.
Read CCA 202117012 [PDF 106 KB] (released April 30, 2021, and dated April 2, 2021)
*Chief Counsel Advice (CCA) materials are written advice or instructions prepared by the Office of Chief Counsel and issued to field or service center employees of the IRS or Office of Chief Counsel. IRC section 6110(i)(1)(A) defines CCA as written advice or instruction, under whatever name or designation, prepared by any National Office component of the Office of Chief Counsel that (1) is issued to Field or Service Center employees of the Service or Field employees of the Office of Chief Counsel, and (2) conveys any legal interpretation of a revenue provision, any Service or Office of Chief Counsel position or policy concerning a revenue provision, or any legal interpretation of state law, foreign law, or other Federal law relating to the assessment or collection of any liability under a revenue provision. CCA includes both taxpayer specific and nontaxpayer specific advice.
The taxpayer—a sole proprietor and a Schedule C business owner—wholly owns and operates a business in either: (1) his or her own personal capacity, or (2) through a single-member LLC which is disregarded as an entity separate from its owner for federal income tax purposes.
The sole proprietor owns an aircraft either directly or indirectly through a single-member LLC and uses the aircraft to travel for business and entertainment purposes. Family members, friends, and business associates of the sole proprietor regularly travel with the sole proprietor on the aircraft.
The question presented was whether the taxpayer may use the “primary purpose test” under Reg. section 1.162-2(b)(1) to determine the deductibility of expenses for use of the aircraft by the sole proprietor—instead of applying the allocation methods in Reg. section 1.274-10(e).
The Chief Counsel memo concludes that a sole proprietor who owns an aircraft (either directly or indirectly through a disregarded entity) may use the primary purpose test in Reg. section 1.162-2(b)(1) to determine whether expenses for use of the aircraft by the sole proprietor are deductible.
The CCA memo continues to explain that sections 274(e)(2) and (9) and Reg. section 1.274-10 do not apply to expenses for use by a sole proprietor of an aircraft owned by the sole proprietor, but that limitations under other sections—including section 274(a)(1) for entertainment expenses and section 274(m)(3) for travel expenses of a spouse, dependent or others—may apply.
The CCA memo explains that
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