Tag: IRS

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

Year End 100% Aircraft Bonus Depreciation

Aircraft Bonus Depreciation
Aircraft bonus depreciation still in sight

From year-end 2011:  “As the holidays approach our thoughts become preoccupied with but one thing: how can I purchase an aircraft and write off 100% of the cost basis in the first year? Well, perhaps not for everyone, but here’s what you need to know: if you purchase an aircraft and place it in service by December 31, 2011 you will qualify for the 100% bonus provision provided you meet all of the other requirements. This is a considerable benefit under any circumstances.

If this is NOT possible, however, and you must place your aircraft in service next year, you are probably still better off than you would have been had you “only” been able to take the 50% bonus. This is because assets placed in service in the fourth quarter of the year do not receive the full first-year depreciation allowance. Your bonus allowance reverts back to 50% for assets placed in service in 2012. By waiting until early next year, you still receive this benefit, but are now able to take the full year MACRS depreciation allowance. In other words, unless the value of your depreciation allowance is considerably greater than it will be next year, you’re better off taking your time and making sure you have done your tax planning carefully, not only at the federal but also at the state – sales tax – level.”

Update 2012:  The good news:  100% bonus depreciation is still with us on qualified aircraft purchases through the end of this year.  What’s “qualified”?  There are several factors, including that you purchase a new (or substantially rebuilt) aircraft, and that you take delivery and place it in service before the end of the year.

The bad news:  This might not be around forever, which as bad news goes is pretty acceptable in my book.

IRS Takes Aim At Professionals

The IRS maintains “Audit Technique Guides” for use by its examiners in auditing different types of businesses. These guides identify the issues that the auditor should be reviewing and the types of documentation the auditor should review in addressing these issues.

The taxpayer can use these Guides to his advantage in several ways. Naturally it is always helpful to have your opponent’s playbook before the game. While an auditor might not be bound strictly to the principles in the Guide (it is advisory rather than mandatory), you can point to its guidelines if there are points of disagreement as to what the auditor wants to review or the scope of the audit. Always remember, too, to verify that the years to be examined are not closed (generally tax years more than 3 years absent fraud and with timely filed returns). You can similarly point to the Internal Revenue Manual (I.R.M.) as “persuasive” authority that you are correct on a particular point of tax law.

With that background, the Service has recently updated its guides for audits of Attorneys and Business Consultants. One particular area of interest is in the Attorney guide on the subject of attorney-client privilege. The guide correctly recognizes that an attorney and his or her client have the right to assert this privilege against the IRS. The Service may be able to overcome this privilege in some cases by issuing a summons, if there is evidence of fraud or in criminal matters. The tax attorney must carefully review the information to be produced, however, consistent with his or her ethical obligations to his clients, and insist that the Service strictly adhere to its procedures for issuing summons to acquire protected communications. The Service may not audit an attorney as a fishing expedition for information about the attorney’s clients.

As a tax attorney I often represent other professionals against the IRS and Florida Department of Revenue in federal income tax, and Florida sales tax, use tax and employment tax audits. If you would like more information about defending your legal rights in this area please visit me at https://www.goodattorneysatlaw.com/tax.html.

For the IRS Attorney Audit Technique Guide see http://www.irs.gov/businesses/small/article/0,,id=241098,00.html