Page 275 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 6. Employee Benefits and Perquisites 261

Since normal commuting is not considered a business expense, where it is an issue
(and the executive therefore has a tax liability), the company will impute an income either
monthly or on the basis of cents per mile (perhaps factoring in an alternative form such
as commuter rail cost). In such cases, the car, like the airplane, may be perceived as more
valuable than its tax effectiveness.
Alternatively, the company could consider the entire cost personal and impute it as
income. The executive would then be reimbursed for business use through the expense
account. The advantage is no record keeping.
Increasingly, companies are providing chauffeured limousines under the guise of
protection for the executive. This is supported by the view that the executive’s well-being is
threatened and the chauffeur is also a bodyguard. To reinforce this view, the driver is either
a former law enforcement officer or familiar with bodyguard requirements (possibly
licensed to carry firearms) and is trained in defensive driving techniques such as escaping
ambushes. While commuting costs are not a business expense, providing for the safety of an
executive could be considered a legitimate expense. These situations would probably have
to be evaluated on a case-by-case basis. A liberal auto policy may be of high value to the
executive.
Aircraft. Use of corporate aircraft has been a very popular perquisite for both business and
personal use for CEO, and other top executives, sometimes extending for life or at least until
postemployment consulting agreements terminate. This includes both fixed-wing and rotat-
ing-wing aircraft (helicopters). As a business form of transportation, it affords a flexibility of
scheduling not possible with commercial flights. In addition, some locations are not serviced
by direct commercial flights, and use of corporate aircraft allows more efficient use of exec-
utive time. Reportedly, commercial flights only service about 10 percent of U.S. airports.
Most company aircraft are as comfortable as first-class commercial service, if not more
so. Some have a galley (other than a refrigerator), and the food and beverage service is at least
as good as first-class commercial. When using commercial aircraft, allowing the executive to
keep the frequent flyer miles permits personal travel in the future for self and family.
When allowing personal use, a company must determine between company cost and fair
market value. Using company cost, there is no additional expense for allowing an executive
to use an empty seat on a corporate jet for personal use when the aircraft is delivering one or
more executives to the same city for business purposes; the tax effectiveness is 100 percent.
Conversely, if the executive is the only passenger, the full corporate cost could be multiples
of commercial flight. Using fair market value would suggest charging the executive the equiv-
alent of first-class commercial fare, thereby giving it a high importance to many executives.
Adopting the company-cost approach would be more logical for a company that allowed
personal use only in conjunction with business flights. Adopting the fair market value would
seem more feasible for a company that allowed personal-use-only flights as well as hitchhiking
a seat on a business flight. The company-cost approach might only include operational
expenses such as fuel and landing fees, on the assumption that the crew is salaried and the air-
plane amortization schedule is not affected. For this reason many companies adopted the
Standard Industry Fair Level (SIFL) approach which is roughly based on first-class air fares.
The 2005 American Jobs Creation Act, however, changed how companies could take tax
deductions for non-business use of corporate aircraft. The amount companies can now
deduct is limited to the amount that is imputed income to the passenger(s). Thus, if the SIFL
value is the basis for imputing income, the company is unable to expense other fixed and