Excise Tax Law

IRS to publish last rule on federal excise tax | Holland & Knight LLP

January 15, 2021

The Internal Revenue Service (IRS) is expected to release its final federal excise tax (FET) exemption scheme for aircraft management companies and owners shortly. The pre-published definitive IRS rules contain several key changes proposed by the National Business Aviation Association (NBAA) to remove potential confusion and provide clear standards for taxpayers and the government. The final regulation is still pending.

The NBAA announced that its lobbying work, led by Holland & Knight Partners and NBAA Tax Committee Chairman John Hoover, has successfully received several referrals aimed at preventing the abusive use of FETs on management companies and aircraft owners in the final Provisions are included. The NBAA, the National Air Transportation Association (NATA), and Mr. Hoover have been working with the IRS and the US Treasury Department on these regulations since the Tax Cut and Jobs Act went into effect in 2017. (See previous warnings from Holland & Knight, “NATA, NBAA Announces Tax Exemption for Federal Aircraft Management Services to Treasury Department,” Nov. 24, 2020, and “NBAA, NATA, Submits Comments to IRS on Excise Tax Exemption for Business Aircraft Management Services,” September 30, 2020. )

Mr. Hoover noted that the IRS acknowledged many of the NBAA’s recommendations. He noted that the IRS confirmed that owner trust agreements apply as aircraft owners to be eligible for the exemption and that the IRS has completely abolished a pair of anti-abuse rules as well as a complicated calculation involving replacement aircraft. (See “IRS Grants Some Relief on Final Aviation Excise Regulation,” Tax Notes Today, Jan. 12, 2021.)

In response to NBAA comments, the final regulation became:

  • Confirms Owner Trust Agreements, which register thousands of business aircraft for regulatory compliance, qualify for the FET exemption.
  • provides a proposal to expand the definition of disqualified leases from the FET exemption, which would have severely limited the application of the exemption to many joint aircraft ownership structures.
  • eliminates a complicated allocation method that would have been required if management companies had offered flights on a replacement aircraft. Instead, only the market value of those specific charter flights with replacement aircraft is generally subject to the FET.
  • clarifies that aircraft owners can qualify for the FET exemption whether they are flying their own aircraft under Part 91 or Part 135 of the Federal Aviation Regulations.