Beginning in 2018, Internal Revenue Code (I.R.C.) Section 274(l) disallows deductions for the cost of flights provided to an "employee" for commuting. While this deduction disallowance may apply to employees of Subchapter C corporations, it should not apply to flights provided by partnerships to partners or to flights provided by Subchapter S corporations to 2-percent shareholders. Partners in partnerships and 2-percent shareholders in Subchapter S corporations are not "employees" subject to the commuting deduction disallowance.
For this purpose, "employee" is defined in Treasury Regulation § 1.274-14 as follows:
[E]mployee means an employee of the taxpayer as defined in [I.R.C.] section 3121(d)(1) and (2) (that is, officers of a corporate taxpayer and employees of the taxpayer under the common law rules).
Under § 3121(d)(1), "employee" does not include a partner in a partnership. Rev. Rul. 69-184, 1969-1 C.B. 256 ("Bona fide members of a partnership are not employees of the partnership ..."); Chief Coun. Adv. 2001-17-003 (April 30, 2001) ("Bona fide members of a partnership cannot be employees ...").
The term "employee" under § 274(l)(1) also does not include 2-percent shareholders of Subchapter S corporations. Under § 1372, such shareholders are not employees for fringe benefit purposes for income tax purposes. In this regard, § 1372(a) provides:
For purposes of applying the provisions of this subtitle [Subtitle A – Income Taxes] which relate to employee fringe benefits–...
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