IRS to Extend 7.5 Percent Federal Excise Tax to Cover Business Aircraft Operations -- Tax Significantly Impacts Business Aircraft Owners and Management Companies

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If your aircraft is managed by a third party (or potentially by a related entity), or if your company manages aircraft, the IRS’s recent guidance expanding the applicability of federal excise tax will significantly impact your costs and tax collection obligations.

A 7.5 percent federal excise tax (“FET”) has long been assessed on amounts paid for commercial air transportation in the U.S. Until now, the IRS accepted that this FET for aircraft “transportation” only applies to Part 135 operations, such as aircraft charters or commercial aircraft flights. However, in a memorandum issued by the IRS Office of Chief Counsel on March 9, the IRS drastically departed from this standard, signaling that the IRS will broadly apply the excise tax to cover nearly all aircraft management fees and operational costs incurred by many non-commercial business aircraft owner/operators (i.e., Part 91 operators). This departure will have significant and broad impact on the business aviation community because many (if not most) aircraft owners hire aircraft management companies for their expertise in maintaining and operating aircraft. Owners often don’t want the burden or liabilities associated with aircraft management.

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