We recently spoke with Trusted BizJetJobs.com Aviation Advisor, aviation attorney, pilot CPA and former airline captain Nick Romer about what has sometimes been euphemistically called “Part 134.5,” or the practice of flying for hire almost within the FARs.
“Part 134.5” can occur when career-seeking commercially-rated pilots build flight time by flying friends, business associates, or property in exchange for more than just flight expense sharing in an aircraft the pilot provided. Similarly, corporate pilots may accommodate a person by providing an aircraft and transporting the person or property in exchange for some form of compensation or other quantifiable benefit. The aircraft provided may even be FAR Part 135 certified, or the pilots may be Part 135 qualified, but if the flying is not in conjunction with a Part 135 certificated carrier, the flights violate Part 135. Romer wants BizJetJobs.com pilots to know that there are risks involved in this type of activity, not only to your airman certificates and financial penalties levied by the FAA, but also with the IRS.
What pilots and owners may not consider are the risks they are facing with the IRS if their activity can be considered more than mere flight cost sharing. The IRS certainly expects a pilot to report all revenue collected if the activity can be characterized in any way as having a profit motive, but also even if there is no profit motive and the activity results in an operating loss. There are potential dire consequences for not reporting gross income if a pilot has collected funds of any significance and especially if on a regular basis (a felony under Title 26 U.S.C. Sec. 7206(1)).
The problem is that if a pilot appropriately reports this activity for income tax purposes to abide by tax law, (s)he has created evidence for the FAA to allege illegal charter activity, and the sanctions a pilot can expect for such activity is a monetary fine of $11,000 per departure plus airman certificate enforcement action.
Attorney Romer says the safest course, with regard to both the IRS and the FAA, is to retain documentation that the financial arrangement associated with a flight was strictly flight cost sharing. Romer also warns that, although the IRS typically considers revenues to be in the form of money or property, the FAA has a very broad interpretation of what constitutes compensation or hire, and it extends well beyond financial rewards. Finally, if the pilot offers only pilot services, e.g. the passenger legitimately provides the aircraft and hires the pilot separately, FAR Part 135 may not implicated, but since the revenues collected should be reported to the IRS, documentation that the arrangement was not a charter should be retained.