Category: Aircraft Excise Tax

Who’s In Charge Here? (And when does federal excise tax apply?)

The most important factor to consider when you consider whether federal excise tax is due on aircraft rentals is whether the owner-lessor of the aircraft transfers “possession, command and control” of the aircraft to the lessee.

Where an S corporation leased an aircraft (its sole asset) to a related C corporation, and the S corporation employed a pilot and crew to operate and maintain the aircraft, and was also responsible for providing alternative aircraft if its aircraft were unavailable, the S corporation retained possession, command, and control of the aircraft. The C corporation’s lease payments were therefore subject to the air transportation tax.

Rent paid for a bare (or “dry”) aircraft lease, where the payee doesn’t exercise such possession (that is, for more than a temporary period typical of a lease, hours or perhaps a few days), “command” (usually, in the form of providing pilots), or “control” (as in “operational control”) isn’t a taxable payment for transportation.

Assuming you have a taxable flight the question then becomes which charges are taxable.  In one case the rent a lessee paid to an airline for the lease of a plane to transport company personnel was an amount paid for taxable transportation.  The “amounts paid” for such transportation, however, excluded nontransportation charges such as food and certain expenses of painting and modifying the plane, in part because such charges were separable and are shown separately in the lessor’s records.  All air transportation companies (or dry lessors) should make it a practice to break out these types of charges as specifically as possible, both internally and in invoices given to the customer.

In another case rent for helicopter service paid by an oil company using the helicopter for oil exploration is payment for transportation if the helicopter company provides the pilots, retains command, control and possession of the helicopter and performs the operational services.

Amounts paid to a helicopter rental company for the hourly, per diem, and 30-day charges for the furnishing of helicopters with pilots to a company for the transportation of employees to and from job sites was subject to tax.  The Court of Claims held that the air transportation tax is imposed on both the monthly charge paid to a helicopter rental company to insure the availability of helicopter service, and the hourly charge paid for the actual use of the helicopter.

Contact us for citations or further guidance:  877.771.1131

IRS Suspends Aircraft Management Tax Assessments

The Internal Revenue Service (IRS) is suspending tax assessments applied to aircraft management companies during federal exercise tax (FET) audits while it develops additional guidance for auditing aircraft management operations.

The suspension is the result of government-industry collaboration since 2008, when the agency released an audit technique guide, and began assessing FET
on a wide variety of non-commercial flight operations. These assessments included FET on a “wide variety of non-commercial flight operations,” including flights
under Part 91 of the Federal Aviation Regulations, according to the National Business Aviation Association (NBAA).

IRS’ suspension of the audits comes following a meeting between the agency and NBAA, along with officials from the National Air Transportation Association (NATA) last week to discuss a possible suspension.

“Since 2008, NBAA has been diligently working with senior officials at the IRS to address significant industry concerns about the applicability of FET to management companies,” said NBAA President Ed Bolen. “Today’s announcement that IRS will suspend any potential assessments on these audits until the work to develop formal guidance is complete.”

The agency will still be completing open audits, though the aircraft management companies will not be subject to the tax assessments while the additional guidance is being developed. IRS is expected to release additional guidance for aircraft management companies in June.

By Woodrow Bellamy III

Federal Excise Tax Audits: How smart decisions can keep you out of trouble

The Federal Excise Tax (FET) on commercial flights, by definition, is a tax on “amounts paid for transportation by air of persons” under IRC Sec. 4261. This generally refers to transportation by air that begins and ends in the United States. Traditionally non-transportation services such as charges for meals, hotel accommodations and so forth have not been subject to FET, nor have aircraft management services that do not relate to particular flights.

Federal excise tax audits haven’t always been a bone of contention for smaller private aviation companies. More recently, however, management companies, brokers and owners have growing concerns that they may be next on the list to be audited.

The FET has been an easy way for the IRS to target these companies for audit based on the somewhat loose definition of what makes an “amount paid for transportation”. Many private aviation companies charge one fee that includes both transportation and non-transportation components. The operator may subtract the amount received for non-transportation services, and pay the government its 7.5% on the “true” transportation amount, fine. A one size fits all invoice however, while customer friendly, can create a headache. A best practice is to break out the charges for transportation and non-transportation charges for everyone to see. Why make your life hard and the auditor’s job easy?

And what of charter brokers? Upon audit the IRS could view a charter broker as assuming the burden of making sure the FET is paid, despite the fact that he isn’t responsible for the operator’s taxes. The broker could be fingered as a responsible party having touched the taxable amounts. One suggestion: include language in your brokerage agreement that clearly specifies that it is the operator who collects and is responsible for paying “any and all applicable taxes”.

Further, even if you collect a lump sum from you customer, make this separation before sending it along to the operator. You might even consider making two separate payments to the operator based on what THEY consider their taxable or non-taxable services. Be ready to present a detailed account of what you collected, for what, from whom, and who is required to calculate and remit the tax. To a numbers guy numbers speak louder than words.

Contact us today for a brief consultation to make sure your tax records are in line both you’re your business practices and the best practices when it comes to FET. With these matters squared away, and the threat of audit diminished, you can focus your energies where they belong: your business.

IRS Federal Excise Tax Surprise – New Rules For Aircraft Management Companies?

IRS Federal Excise Tax
IRS excise tax & aircraft management companies:  and you thought the catering was exempt

The IRS’ new view of federal excise tax on aircraft management services in unwelcome indeed. To recap, in an IRS Chief Counsel Memorandum Re Federal Excise Tax and Aircraft Management Companies, the IRS is taking the position that aircraft services such as hiring and providing pilots and management services, even for part 91 aircraft, are “amounts paid” for “transportation services” and therefore subject to federal excise tax.  This in essence has the potential to raise general aviation services costs by 7.5%, a federal excise tax surprise that neither aircraft management companies nor aircraft owners need in this environment.

It has never been disputed that ” amounts paid” for commercial flights under Parts 121 or 135 are subject to excise tax as “taxable transportation”, and the price and availability of these flights reflect this.  Part 91 owners and operators make a conscious decision to assume more risk in retaining “operational control” of their flights and pay management companies for collateral services in making pilots, fuel and services available.  We could be left under the IRS’ new policy where a private aircraft owner would have to pay excise tax for flights over which he still has full legal liability.  This is clearly a surprise when it comes to federal excise tax, for the owners and aircraft management company alike.

Unfortunately there is also a “gotcha” factor here.  One might conclude that the IRS’ apparent aggressiveness with respect to auditing, and potentially assessing, federal excise tax against aircraft management companies is designed to catch us off guard.  There are a couple of problems with this.  First, a Chief Counsel opinion details the Service’s interpretation of existing law.  It is not equivalent to the Internal Revenue Code, regulations or Tax Court decisions, and therefore forms a questionable basis upon which to set aircraft management companies up for formal federal excise tax audits.  Second, if in time aircraft management companies are deemed to be receiving “amounts paid for taxable transportation” for support services, the industry must be given some reasonable opportunity to adjust to this without facing retroactive application of a brand-new interpretation along with the interest and penalties that go with it.

Call me for a free phone consultation if you think you may be subject to the new federal excise tax rules.  877.771.1131