NBAA’s advocacy efforts on behalf of aircraft charter and management companies took a step forward with the recent publication of an IRS NPRM dealing with a controversial federal excise tax (FET) issue.
For more than a decade, NBAA has led efforts to overturn an IRS legal interpretation that subjected management services provided to aircraft owners to a 7.5% tax on commercial air transportation. This interpretation, which was inconsistent with applicable law, meant that management companies faced potentially crippling retroactive tax assessments.
In addition to advocacy at the IRS and Department of the Treasury, resulting in a suspension of tax assessments, NBAA worked with champions on Capitol Hill to advocate for a legislative solution. This work paid off, as the Tax Cuts and Jobs Act (TCJA), signed into law in December 2017, contained a provision addressing the application of FET to aircraft management companies.
“NBAA seeks to clarify and reinforce that an aircraft owner can conduct flights under Part 91 or 135 and be covered by the FET exemption.”
The TCJA provision exempts payments for aircraft management services made by the aircraft owner for flights on their aircraft. Through this exemption, aircraft owners can utilize the support services provided by a management company without fear that those payments will be subject to the 7.5% tax. The legislation broadly defines the types of management services covered by the exemption, so long as they are paid for by the aircraft owner in connection with flights on the owner’s aircraft.
With the passage of the TCJA, the IRS began to update FET regulations in the tax code. NBAA and industry stakeholders held meetings with IRS and Treasury officials to advocate for guidance that closely followed Congressional intent.
For example, so long as owners are paying for management services in connection with their aircraft, flights conducted under both Part 91 and 135 should be exempt.
Issuance of the NPRM provides details on how the IRS interprets the legislation and an opportunity for stakeholders to comment. In general, the IRS proposed positions are consistent with industry interpretations; however, NBAA recently submitted detailed comments.
On the issue of payments by the aircraft owner for management services, NBAA’s comments advocate for a broad definition of “aircraft owner” to include payments by affiliated entities. With many aircraft owned by entities such as LLCs and then dry leased to the principal or operating company, a broad definition of which entity can pay for the management services is consistent with industry practices.
NBAA’s comments also seek to clarify and reinforce that an aircraft owner can conduct flights under Part 91 or 135 and be covered by the exemption. While the TCJA provision is explicit that the exemption applies regardless of how the owner’s aircraft is operated, additional clarity is desirable.
The NBAA Tax Committee led efforts to analyze the NPRM and develop detailed comments. Next steps include a meeting with the IRS and other industry stakeholders to discuss the rulemaking. Based on the pace of the regulatory effort, a final rule is anticipated in mid-2021.
Industry Challenge
For years, the IRS asserted that management services provided to aircraft owners should be subject to the 7.5% tax on commercial air transportation. This meant that management companies faced potentially crippling retroactive tax assessments.
NBAA Response
NBAA is working with the IRS on a rulemaking that would exempt from federal excise tax the payments for aircraft management services made by the aircraft owner for flights on their aircraft.
International Business Aviation Council Ltd.