Federal excise taxes (FET) are taxes imposed on either fuel or on the transportation of persons or property. Both private and commercial business aircraft operators pay FET. Most private operators operating under Part 91 pay FET (fuel tax) on non-commercial flights. Commercial operators, those persons operating under Part 135, are subject to the tax on the transportation of persons or property.

For non-commercial transportation, the fuel tax is a cents-per-gallon tax. There are different rates for both aviation gasoline and jet fuel. Mostly, this type of FET applies only to non-commercial transportation. While this tax is paid/used in commercial transportation, the ultimate purchaser can usually claim a refund less a small portion of the tax.

For commercial transportation, FET takes the form of a percentage tax or a head tax, or both. Primarily, FET is a percentage tax on the amount paid for commercial transportation. However, FET can consist of a segment fee due on each domestic segment and a head tax (which applies to the international transportation of persons).

The Internal Revenue Service (IRS) and Federal Aviation Administration (FAA) consider commercial and non-commercial operations differently. Operations that might be viewed as non-commercial by the FAA could be considered to be commercial by the IRS for FET purposes.

The Internal Revenue Service (IRS) recently issued Revenue Procedure 2010-13. This Rev. Proc. requires taxpayers to file a statement that is attached to their income tax return that declares that separate activities are grouped together for purposes of the passive-loss rules. If this statement is not attached to the return the IRS could contend that the taxpayer’s business aircraft operations are a separate passive activity. The consequence of failing to file the statement is that tax losses incurred by operations may be limited and therefore not be deductible against the operating income of the business’s primary income. If you have questions or need clarification about Rev. Proc. 2010-13 click here to contact Paul.

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