BOSTON: As U.S. corporate jet use approaches pre-financial crisis levels and chief executives take an increasing number of personal trips on the company tab, many investors are being kept in the dark about the true cost of the perk.
For the S&P 500 companies that pay for their CEOs to use corporate jets for private trips, the estimated median value of that flying climbed 11 percent last year to US$107,286 from US$96,532 in 2017, according to the latest available figures from compensation research firm Equilar Inc. That is up 27 percent from US$84,636 in 2007, the year before the financial crisis.
This is taxable income for executives. The estimates are often based on what a first-class seat would have cost on a commercial flight rather than on the true, much higher cost of using a corporate jet.
But not only are companies left to pay the full cost of those flights, which can be for anything from family vacations to trips to major sports events or a commute from a distant family home, but they can also find that their tax bills can be significantly higher because of lost deductions.
That is because the U.S. Internal Revenue Service has limited a company's deductions on personal aircraft use to the estimated valuation of the executives' flights.
As a result, companies forfeit a long list of tax deductions for the time the jets are used for personal trips, including pilots' salaries, maintenance costs, insurance, aircraft depreciation and finance charges. Companies usually can deduct the full cost of these expenses when planes are used for business flights.
Exacerbating the issue, U.S. President Donald Trump's 2017 Tax Cuts and Jobs Act eliminated deductions on two kinds of flights, said Ruth Wimer, a tax expert and partner at law firm Winston & Strawn LLP in Washington. They are for trips taken purely for business entertainment - such as a CEO taking clients to a golf tournament - and an executive's use of a corporate jet to commute to work from his home, she said.
However, given that the U.S. Securities and Exchange Commission does not require disclosure of such lost deductions, investors are none the wiser.
U.S. business jet operations are on track to top 4.5 million arrivals and departures in 2019, the highest since 2007, according to U.S. Federal Aviation Administration data, though only a small percentage are by major company executives.
Popular perceptions of U.S. corporate jet use hit a nadir in 2008 as the financial crisis was worsening. That was when members of Congress blasted the CEOs of the three big U.S. automakers for flying to Washington on corporate jets to ask for financial help.
The fallout was so bad that in the terms of its bailout General Motors Co was initially barred from corporate jet use.
"But since then, the whole economy has turned around. The stock market is setting records and jet use has rebounded along with it," said Nick Copley, president of SherpaReport.com, which analyzes private aviation trends.
GM is back to operating its own corporate aircraft, according to its disclosures.
'HIDDEN ELEMENT OF EXECUTIVE PAY'
The true cost of corporate jets are a mystery for investors in many companies, though.
A Reuters analysis of proxy filings by companies in the S&P 500 found that only a handful detailed the value of lost deductions in their public filings.
Among the few to disclose was payments system and credit card company Visa Inc. Its lost deductions from the personal use of company jets by executives and their guests have more than quadrupled between 2016 and 2018, and totaled US$4.8 million in its fiscal year to September 2018, according to the company’s last proxy statement.
Visa did not reply to messages seeking comment.
Another exception is cable and broadcast TV group Comcast Corp, which reported US$8.8 million in disallowed deductions in 2018 on flights taken by its executives and guests.
Comcast declined to comment.
This is a hidden element of executive pay, said Dieter Waizenegger, executive director of CtW Investment Group, which represents union-sponsored pension funds with nearly 5 million members.
"Having a better sense of how expensive the C-suite is for the company is a very relevant number," Waizenegger said. "If they aren’t disclosed, investors won't know about these lost deductions."
While the costs for Visa and Comcast, both with annual net earnings of more than US$10 billion, may be a drop in the bucket, lost deductions for smaller companies can have a much bigger impact.
Earlier this year, San Francisco-based hedge fund Voce Capital Management LLC targeted disallowed tax deductions in its campaign to gain board seats at insurer Argo Group International Holdings Ltd.
The hedge fund argued the Bermuda-based insurance company, which had net income of US$63.6 million in 2018, was hurting investors by racking up disallowed tax deductions from corporate jets "crisscrossing the globe at a dizzying pace."
Argo declined to comment for this story. It has said previously that when its executives use corporate aircraft for personal trips they do so at their own expense. However, it does not disclose how that is calculated or detail any lost tax deductions as a result of personal travel.
Voce has not provided any estimates for lost tax deductions. It did not reply to messages seeking comment.
However, it did outline in a statement earlier this year what it said "most ordinary people would consider the trip of a lifetime," by then Argo CEO Mark Watson and his family on an Argo Gulfstream jet during the 2017 Christmas holidays.
The trip began in San Antonio, Texas, with stops in Bermuda, New York, Copenhagen and the Malabar Coast of India, Jaipur in northern India, Amsterdam, and then back to Texas over a three-week period.
The company said in October the SEC was investigating Argo's disclosures about executive compensation. Within a few weeks, the company announced Watson's departure.
(Reporting By Tim McLaughlin in Boston; Editing by Martin Howell and Bill Rigby)