Final rules from the IRS provide aircraft management companies and owners much-needed clarity on their federal excise tax (FET) obligations but, as experts from the NBAA Tax Committee noted in a recent NBAA News Hour webinar, taxpayers must carefully review the rules to determine how they apply to specific aircraft ownership and operating structures.
The final rule, issued by the IRS at the beginning of the year and effective now, is the culmination of an industry effort, led by NBAA, which started in 2009 to stop improper application of a 7.5% air transportation tax – a ticket tax – on management services paid for by an aircraft owner even when they were flying their own aircraft.
“This improper application of FET was detrimental to the industry and caused significant problems for management companies, but thanks to the efforts of the NBAA Tax Committee we have congressional support through the Tax Cut and Jobs Act and a new regulation that provides certainty and clarity to the industry,” said NBAA Senior Director, Government Affairs Scott O’Brien, who moderated the webinar.
NBAA’s Tax Committee members played a pivotal role in the rulemaking process, including an important revision to the IRS’s understanding of owner trusts arrangements.
“There was a concern that because the IRS’s proposed rule rejected the idea of including related parties in the FET exemption that the IRS would treat a trustee and the beneficial owner of the trust as related parties,” noted Jeff Towers, vice president and general counsel of trust services firm TVPX. “After hearing our concerns on how owner trusts, which are used to register thousands of business aircraft, could be unintentionally excluded from the exemption, the IRS in its final rule made clear that owner trusts are respected for the purposes of the FET exemption.”
Another important provision added to the IRS’s final rule, at NBAA’s urging, clarifies that aircraft owners qualify for the FET exemption regardless of whether the flights are conducted under Part 91 or Part 135 of the Federal Aviation Regulations.
“This clarification is an important win for the aircraft management world,” said Lori McGee, partner at Jetstream Aviation Law. “This provision, with a few caveats, opens up a lot of opportunities to select the part of the FARs that will work best for you from a liability, operational and cost standpoint.”
John Hoover, NBAA Tax Committee chair and partner at Holland & Knight, also noted the importance of carefully drafting aircraft lease agreements for purposes of the FET exemption.
“One structure that causes me concern is the single-member LLC that owns an aircraft,” said Hoover. “If that single-member LLC draws up a lease to me, then I’m deemed the owner and I can hire management services and qualify for the FET exception, but if I forget to draw up the lease and then hire a management services company, I’m not a deemed owner because the single-member LLC is the owner, and I’m not a lessee as I didn’t draw up a lease, so there is a concern that in that structure I may not qualify for the FET exception.”
The Tax Committee continues to analyze the final rule and plans to publish a detailed article and additional educational content in the coming months and will host a virtual tax seminar later this spring.