Section 4261 of the IRC typically imposes a special 7.5% air tax on amounts paid for "taxable transportation" and certain segment-specific dollar taxes. However, certain "aircraft management services" are exempt from tax after the addition of subsection (e)(5) to IRC section 4261 under the TCJA 2017. The Internal Revenue Code defines aircraft management services as comprising
Administrative and support services,
Obtaining insurance,
Maintenance, storage, and refueling,
Procurement, training, and provision of pilots and crews,
Establishment and observance of safety standards and
Other services are necessary to support flights operated by an aircraft owner.
Section 4261 (e)(5) generally exempts from excise duty any amount paid by the aircraft owner (or lessee) for aircraft management services provided to the owner (or lessee) of the aircraft. The theory is that someone should not pay excise duty on expenses paid to owning or leasing an aircraft. However, for various state expense and liability reasons, aircraft management is often separate from the ownership of aircraft. When parties related to aircraft owners provide aircraft maintenance/assistance/flight services, tax practitioners wonder if and how the new exception applies.
An aircraft owner includes a lessee of the aircraft unless the lease is considered a "disqualified lease" under the IRC.
This article defines a disqualified lease as a lease from a person providing aircraft management services in connection with the aircraft (or an affiliated person) if the lease is for a term of thirty-one days or less. Hence, in various circumstances, aircraft management services paid for by a lessee may also qualify for the exemption in the paragraph.
The Internal Revenue Service (IRS) released proposed federal product tax regulations that charge certain amounts paid for people and goods' air transportation. The regulation interprets the exemption in a way that should affect many taxpayers who own or operate aircraft, provided they ensure that they organize their activities per the guidelines provided.
The National Business Aviation Association (NBAA), which had sought advice on several outstanding issues, welcomed the proposed settlement. These outstanding items included:
An expanded definition of "aircraft owner."
Clarifying that the operation of the aircraft under part 91 or 135 of the federal aviation regulations does not affect the operation of the aircraft applicability federal consumption tax and
Clarify the possible impact of payment terms for management services.
Aircraft Owner
The IRS has refused to take a taxpayer-friendly approach to expand the aircraft owner's definition to include members of an affiliated group or an ignored entity's tax holder. Many customers who own private jets do so through an exclusive limited liability company (sole shareholder). The standard tax classification for a one-member limited liability company is an "excluded entity" for federal income tax purposes, which definitely means that they do not exist separately from their owners and therefore report their assets active in owners' tax returns. But, this treatment does not stretch to other types of federal taxes, such as labor taxes and excise duties. A similar problem arises for S Corps and the use of qualified subsidiaries in the S subchapter (QSubs).
To qualify for IRC section 4261 (e) (5) exemption, the aircraft's legal owner must make payments; payments made by the tax holder of an excluded entity or an affiliate of related services are not exempt from excise duty. If the tenant is not part of a disqualified lease, he must make payments to secure the exemption.
In some cases, it may not be administratively practical for the landlord or tenant to make payments. In such cases, the aircraft owner must have documents reflecting a revealed paying agency relationship between the person making the payment and the aircraft owner. We encourage customers to review existing documentation and update it as necessary.
Part 135 vs. Part 91
The IRS has refused to deviate from its long-standing policy that the FAA rules do not control federal tax purposes. Whether an aircraft is operated per Part 91 or Part 135 is unrelated to federal excise duties under section 4261 of the Code.
Operation per Part 135 or Part 91 is not expected to impact federal consumer tax considerations.
Payment Terms
Aircraft owners structure their aircraft management service contracts in several ways. Some include fixed monthly or quarterly payments. Some include reimbursement of specific charges and hourly rates for flight services. Others include reimbursement of specific expenses plus a margin (cost-plus method). The proposed regulations require the aircraft owner and the service provider to keep appropriate records. However, the agreement's structure does not affect whether the exemption from excise duty on air transport applies to amounts paid for services.
Mixed-Use
While not explicitly mentioned in the NBAA's request, the IRS also addressed the issue of mixed-use aircraft. Mixed-use occurs when aircraft owners allow third parties to use their aircraft for charter. The IRS has agreed with commentators that such use does not affect the application of amounts paid under Section 4261 by the aircraft owner for handling services.
The decision of aircraft owners to monetize aircraft that would otherwise be inactive by leasing them to chartered operators should not affect the exemption provided in Article 4261 (e) (5).
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