FET on Business Aircraft Flights
While Congress clarified some aspects of the applicability of the Federal Excise Tax (FET) to business aircraft, there are still instances where the tax applies to certain types of flights. The 7.5% tax plus segment fee, imposed under Sections 4261 and 4271 of the Internal Revenue Code (IRC) generally applies to amounts paid for taxable transportation by air. Whether a flight is deemed to be taxable transportation by air depends on who has possession, command, and control of the aircraft on that flight. In determining which party has possession, command, and control, the IRS is not bound by the FAA determination of operational control. In some past rulings and guidance, the IRS has argued that FET applies to certain Part 91 flight costs, but recent changes to tax law by Congress have clarified this point.
IRS Clarifies- FET Does Not Apply to Aircraft Management Services
Changes under the Tax Cuts and Jobs Act of 2017 clarified that amounts paid by aircraft owners for aircraft management services are not subject to FET. Aircraft management services are defined to include a range of expenses, including administrative and support services, insurance, maintenance, crew, and other flight support services. Under the revised language in the Code, certain lessees are also treated as aircraft owners and will enjoy the benefits of this clarification.
Operational Structure is Key
Despite the clarification to the tax law, aircraft owners and lessees may still face multiple issues if their ownership structure and operational structure is not correct. In addition to potential issues with the FAA, insurance, and state taxing authorities, an aircraft owner or lessee can also face the potential surprise applicability of FET if they if they do not have a compliant ownership and operational structure.
Michelle M. Wade is a partner with the law firm of Jetstream Aviation Law and counsels clients on the acquisition, financing and operation of corporate jets operated under Part 91 and Part 135 of the Federal Aviation Regulations. Jetstream Aviation Law can be found at www.JetstreamLaw.com.