Personal Use of Corporate Aircraft: What the Numbers Mean

As part of SEC disclosure requirements, public companies are required to publish compensation for the top five executives and directors, including the value of personal use of corporate aircraft. For the most highly compensated executives, airplane use amount can be well over $100,000. Our April 10 post noted that Sprint CEO Hesse had $609,530 in private use of the corporate airplane (this includes Mr. Hesse’s use and family/friend use). Since use of corporate planes is currently a hot-button item, we thought it would be useful to discuss how the private use figure is calculated.

Corporate plane private use calculations are complex, to say the least. The IRS, Federal Aviation Regulations and SEC all have different rules requiring different calculations for different purposes. The IRS calculation for taxable income charged to an executive is not the same calculation that the SEC requires for proxy disclosure, and neither are the actual cost to the company to operate the aircraft.

The SEC requires that companies value personal use for reporting purposes using the incremental or variable costs of a trip. Those costs are fuel, crew time, airport fees, and a per-hour charge for maintenance. If the plane is traveling to a destination for a business purpose and someone without a business purpose hops a ride, the incremental cost would only be food and beverages. A larger plane, like a Gulfstream V, could cost about $3200 per hour; smaller planes like Citation Excel around $1500 per hour. A Philadelphia to San Francisco flight is about 5 hours, so the round-trip value for a strictly personal trip on a Gulfstream V would be $32,000.

Therefore, if Mr. Hesse was flying on a Gulfstream V, he or his family/friends would have had personal travel that was at least the equivalent of 19 round Philly-SFA trips. The incremental cost valuation applies regardless of how many non-business passengers are flying; it is a fixed rate, not a per-person charge. Also, the rules, either from the SEC or IRS, on what trips get classified as “personal” or non-business are unspecific. That categorization is left to company managers on the basis of what Nel Stubbs, of Conklin and de Decker, aviation consultants, describes as the “grin” test—can you describe the business use without grinning.

Meanwhile, the IRS has another formula to determine the value of the perquisite as taxable income to the executive. The Standard Industry Fare Level (SIFL) is a per-mile rate set by the Department of Transportation that is the basis for an elaborate calculation using several variable multipliers. The final per-person charge depends on a) weight (i.e.size) of the aircraft; b) direct mileage between starting and ending points (side trips to drop off people or refuel are not calculated in); c) terminal charges; and d) whether passenger is or is related to a control employee. Control employees have a 400% multiplier; non-control employees use 31.3%. A one-way trip for a control employee from Philadelphia to San Francisco on a Gulfstream V (heavy) jet would be $2292; for a non-control person the charge is $229. But, as industry professionals point out, control employees are really the only ones who get access to the plane for personal use.

Then there is what companies write off as plane operating expense. Prior to 2004, companies wrote off actual incremental cost while executives had taxable SIFL expense of only a fraction of that amount. The American Jobs Creation Act of 2004, however, now limits the corporate deduction to the amount charged to the individual as taxable income.

Finally, there is the issue of security, and the oft-seen disclosure note that the CEO is “required” to use the company aircraft for all travel for security reasons. If a company has a bona fide security program in place for an executive, then the SIFL control person rate for that executive drops from 400% to 200%. To qualify, the security program must be designed by a third party and have 24/7 security measures appropriate to the risks involved, which may include bodyguards, home security systems, reinforced limos, etc. While such measures are common and necessary in parts of the world where kidnapping executives is its own industry, there is disagreement about how applicable they are in the U.S. and whether the rules regarding such programs are actually followed.

In the end, it would seem that if an executive needs extra protection when she travels to Karachi, having a 24/7 security program (and truly doing it, rather than just having a plan on paper) for the other 99% of her life is an expensive way to reduce her taxable income charge for personal plane use.