Table of Contents
- Chapter 1: Introduction to the Aviation Market Segment
- Chapter 2: Return Filing and Deposit Requirements and Blind Credits
- Filing Requirements
- Deposit Requirements
- Electronic Deposit Requirements
- Electronic Federal Tax Payment System
- Federal Tax Deposit Coupons
- When To Make Deposits
- 9-Day Rule
- Alternative Method (IRS Nos. 22, 26, 27, and 28)
- 14-Day Rule (IRS Nos. 14, 60, 62, 73, 74, 59, 75, and 76)
- Delayed Deposits
- Amount To Deposit
- Safe Harbor Rules
- Requirements To Be Met
- The Look-Back Quarter Liability Safe Harbor Rule
- Exceptions
- The Current Liability Safe Harbor Rule
- Blind Credits
- Chapter 3: Fuel Taxes
- Chapter 4: Collected Taxes
- Chapter 5: Transportation of Persons by Air
- Chapter 6: Commercial Airlines/Scheduled Flights
- Chapter 7: Air Charter
- Chapter 8: Corporate Flight Departments
- Chapter 9: Tour Operators and Travel Agencies
- Chapter 10: Air Transportation of Property
- Appendix: Synopsis of Tax Rules
- Glossary
Chapter 1 - Introduction to the Aviation Market Segment
Background
The aviation market segment includes all persons involved in commercial and noncommercial air transportation. This group includes but is not limited to
- Scheduled commercial airlines,
- On-demand air taxi services,
- Charter airlines,
- Integrated package delivery companies,
- Travel agencies and tour brokers,
- Businesses and individuals that operate aircraft for their own use,
- Individuals who purchase airline tickets, and
- Marketers of fuel that is used in aircraft.
The Internal Revenue Code (IRC) imposes taxes on both commercial and noncommercial aviation. For flights in commercial aviation, a tax is imposed on amounts paid for the transportation of persons by air (IRC section 4261) and property by air (IRC section 4271). Also, commercial aviation is burdened by a relatively small fuel tax on aviation gasoline (IRC sections 4081 and 6421) and aviation fuel (other than gasoline) (IRC section 4091). For flights in noncommercial aviation, a much higher rate of tax on fuel is imposed.
Whether commercial or noncommercial aviation taxes apply is determined on a flight-by-flight basis. Determining which set of taxes applies to which flights is a recurring audit issue. Determining the amount paid for commercial transportation is another recurring audit issue.
Aviation taxes go into the Airport and Airway Trust Fund (IRC section 9502). Expenditures from the fund support the Federal Aviation Administration (FAA).
This document serves as a self-study text and a market segment specialization guide for examiners. The contents of this document are not to be used or cited as authority for setting or sustaining a technical position.
Great caution should be used in applying existing regulations and revenue rulings to present fact situations. The IRC section 4261 regulations, which were last revised in 1963, do not reflect the many changes in the Code since that time. Similarly, many revenue rulings contain out-of-date tax rates and do not reflect the significant changes made in the Code in 1996 and 1997.
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Outside Stakeholders
A partial list of outside stakeholders is provided below.
Trade Associations
- General Aviation Manufacturers Association (manufacturers of airplanes)
- Air Transport Association of America (airlines)
- International Air Transport Association (international airlines)
- Air Transport Association of Canada (Canadian carriers)
- National Business Aviation Association (corporate air operations/business plane users)
- National Air Transportation Association (air charter and freight companies)
- Aircraft Owners and Pilots Association (owners and pilots)
- Regional Airline Association (regional carriers)
- U.S. Air Tour Association (air tour operators)
- Helicopter Association International (helicopter carriers)
- Hawaiian Helicopter Tour Operators Association
- U.S. Parachute Association (skydiving enthusiasts and drop zone operators)
- Association of Air Medical Services (air ambulances)
- American Association of Airport Executives (airport operators)
Federal Agencies
- Federal Aviation Administration (Recipient of Airport and Airway Trust Fund)
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FAA Certificates (Licenses)
The types of certificates (licenses issued by the FAA) are:
- Part 91: Noncommercial (that is, no profit motive rather than the IRS definition of no compensation),
- Part 121: Large carriers of passengers and freight,
- Part 125: Large corporate aircraft and large aircraft used for gambling junkets,
- Part 129: Foreign carriers, and
- Part 135: Small carriers of passengers and freight.
The FAA defines commercial aviation as the carriage of persons or property by air for profit. Compare this to the IRS definition, which simply requires that the carriage be undertaken for compensation. The differing definitions have caused confusion among some aircraft operators. Flight departments often assume that, since a flight is not considered commercial for FAA purposes, the flight is not considered commercial for tax purposes. However, the IRS is not bound by other agencies' definitions. Rev. Rul. 78-75, 1978-1 C.B. 340 states that the status of an aircraft operator as a "commercial operator" under FAA regulations does not determine the commercial or noncommercial status of the operator in the application of the aviation fuel and air transportation taxes.
Air Transportation Excise Issue Specialist Program
The November 1991 Excise Tax Task Force Report addressed the need to move to a market segment approach in the excise tax arena. Corporate decisions were made to integrate market segment approaches throughout all compliance activities. The establishment of a work group to address the air transportation industry was the beginning of the implementation of the market segment approach to excise tax. Members of the work group were selected on the basis of their work, technical experiences, training, and background.
Each member of the work group is responsible for providing advice, assistance, and technical expertise to agents in the planning and conduct of examinations. Please feel free to request assistance from the work group whenever you feel it would be appropriate. This assistance can be in the form of information, advice, or if necessary, physical assistance at the examination sites. The workgroup members develop market segment audit techniques and guidelines, update and revise the Internal Revenue Manual, lead or participate in technical conferences, and submit articles to trade publications. In addition, the group advises IRS Headquarters on issues and practices in the application of the law, emerging issues, changes in technology, and innovative audit techniques from the field.
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Chapter 2 -Return Filing and Deposit Requirements and Blind Credits
Filing Requirements
Fuel Taxes
Forms 720, Quarterly Federal Excise Tax Returns, for aviation fuels taxes (both aviation gasoline and aviation fuel other than gasoline) are required for each calendar quarter. They are due on the last day of the month following the close of the quarter. (Treas. Reg. section 40.6071(a)-1(a)(1))
Air Transportation Taxes
Returns are due 2 months after the close of the quarter when other Forms 720 are due one month after the end of the quarter. (Treas. Reg. section 40.6071(a)-2)
Multiple Taxes
If a taxpayer is required to file returns for two or more taxes with different due dates, the return is due on the later of the due dates. For example, if a taxpayer is required to file a return for both aviation fuel and transportation of persons by air, the return is due on the last day of the second month after the close of the quarter.
Treas. Reg. section 40.6071(a)-1(a)(2))
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Deposit Requirements
Form 720 Schedule A ties deposits to the tax liability.
Electronic Deposit Requirements
The taxpayer must make electronic deposits for all depository taxes that occur after 1997 if
- Total deposits of income tax withheld and Social Security, Medicare, and Railroad Retirement taxes were more than $50,000 in 1996, or
- Total deposits of other depository taxes (such as excise tax) exceeded $50,000.
Electronic Federal Tax Payment System
The Electronic Federal Tax Payment System (EFTPS) must be used to make electronic deposits. If the taxpayer is an employer required to use EFTPS, he or she must also use EFTPS to deposit excise taxes.
Taxpayers who are not required to make electronic deposits may voluntarily participate in the EFTPS Program.
Federal Tax Deposit Coupons
If the taxpayer is not required to use EFTPS and does not voluntarily participate in the EFTPS Program, he or she should deposit federal excise taxes at an authorized depository or the Federal Reserve Bank servicing the area in which he or she is located.
When To Make Deposits
Taxes that are required to be deposited are grouped into the following classes:
- 9-day-rule taxes
- 30-day-rule taxes (not covered in this guide)
- Alternative method taxes
- 14-day-rule taxes
If the taxpayer deposits more than one tax in a class, he or she should combine all the taxes in the class and make one deposit for the semimonthly period.
9-Day Rule
The deposit of tax for a semimonthly period is due by the 9th day following that period. Generally, this is the 24th day of a month and the 9th day of the following month. The 9-day rule applies to all taxes in Part I of Form 720 except for
- Gasoline and diesel fuel tax (IRS Nos. 14, 60, 62, 58, 73, 74, 59, 75, and 76), if deposits by qualified persons are made using EFTPS. (See "14-Day Rule" below.)
- Air transportation taxes (IRS Nos. 26, 27, and 28) if deposits are based on amounts billed or tickets sold, rather than on amounts actually collected. (See "Alternative Method" below.)
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Alternative Method (IRS Nos. 22, 26, 27, and 28)
Deposits of communications and air transportation taxes may be based on amounts billed or tickets sold during a semimonthly period instead of on taxes actually collected during the period. Under the alternative method, the tax included in amounts billed or tickets sold during a semimonthly period is considered collected during the first 7 days of the second month following semimonthly period. The deposit of tax is due by the 3rd banking day after the 7th day of that period.
For example, the tax included in amounts billed or tickets sold for the period from December 16, 1997, to December 31, 1997, is considered collected from January 16, 1998, to January 22, 1998, and must be deposited by January 27, 1998.
To use the alternative method, you must keep a separate account of the tax included in amounts billed or tickets sold during the month and reported on Form 720. The tax is included in amounts billed or tickets sold, not the amount of tax that is actually collected. For example, amounts billed in December, January, and February are considered collected during January, February, and March and are reported on Form 720 as the tax for the 1st quarter of the calendar year.
14-Day Rule (IRS Nos. 14, 60, 62, 58, 73, 74, 59, 75, and 76)
Deposits of the gasoline and diesel fuel tax for a semimonthly period by an independent refiner or any person whose average daily production of crude oil for the preceding calendar quarter did not exceed 1,000 barrels may be made by the 14th day following the semimonthly period. The deposits must be made using EFTPS. If the 14th day is a Saturday, Sunday, or legal holiday, the due date is the immediately preceding day that is not a Saturday, Sunday, or legal holiday. The 14-day rule does not apply to dyed diesel fuel used in trains (IRS No. 71) or to dyed diesel fuel used in certain intercity or local buses (IRS No. 78).
Delayed Deposits
The following deposits have a delayed deposit due date of October 5, 1998:
- Deposits of fuel taxes (IRS Nos. 60, 62, 58, 69, 73, 74, 59, 75, 76, 14, 69, and 77), and transportation of property by air (IRS No. 28), that would be due after July 31, 1998, including the September rule deposit due September 28 or 29, 1998, and before October 1, 1998
- Deposits of transportation of persons by air (IRS No. 26) and use of international travel facilities (IRS No. 27) that would be due after August 14, 1998, including the September rule deposit due September 28 or 29, 1998, and before October 1, 1998
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Amount To Deposit
Deposits of taxes for a semimonthly period must be at least the net tax liability for that period, unless one of the safe harbor rules applies. The safe harbor rules apply separately to deposits under the 9-day rule, the 30-day rule, the alternative method, and the 14-day rule.
The net tax liability for a semi-monthly period is the total liability for the period plus or minus any adjustments for the period. Net tax liability for a semimonthly period may be figured by dividing the net tax liability for the month by 2, provided this method of computation is used for all semimonthly periods in the calendar quarter.
Under the alternative method, the deposit of tax for any semi-monthly period must not be less than the net amount of tax that is considered collected during the semi-monthlyperiod. The net amount of tax that is considered collected during the semi-monthly period must be
- The net amount of tax reflected in the separate account for the corresponding semimonthly period of the previous month, or
- One-half of the net amount of tax reflected in the separate account for the preceding month.
Safe Harbor Rules
There are two safe harbor rules:
- The look-back quarter liability
- The current liability
Requirements To Be Met
For the safe harbor rules to apply, the taxpayer must:
- Make each deposit timely at an authorized Government depository, and
- Pay any underpayment for the current quarter by the due date of the return.
However, if the due date of the return is extended because the taxpayer reports taxes with different return due dates, he or she must deposit on the earlier due date any underpayment for taxes ordinarily reported on the earlier date.
The Look-Back Quarter Liability Safe Harbor Rule
The look-back quarter safe harbor rule applies to persons who filed a Form 720 for the look-back quarter (the 2nd calendar quarter preceding the current quarter). Persons who filed for the look-back quarter are considered to meet the semimonthly deposit requirement if the deposit for each semimonthly period in the current quarter is at least 1/6 (16.67 percent) of the net tax liability reported for the look-back quarter.
For the semi-monthly period for which the additional deposit is required, the additional deposit must be at least 12.23 percent (11.12 percent non-EFTPS) of the net tax liability reported for the look-back quarter. Also, the total deposit for that semi-monthly period must be at least 1/6 (16.67 percent) of the net tax liability reported for the look-back quarter.
Exceptions
The look-back rule does not apply to:
- The 1st and 2nd quarters beginning on or after the effective date of an increase in the rate of tax unless the deposit of taxes for each semi-monthly period in the calendar quarter is at least 1/6 (16.67 percent) of the tax liability that would have been incurred for the look-back quarter if the increased rate of tax had been in effect for that look-back quarter; or
- Deposits of any tax if the tax was not in effect throughout the look-back quarter.
The Current Liability Safe Harbor Rule
The current liability safe harbor rule applies to all filers of Form 720. Filers are considered to meet the semi-monthly deposit requirement if the deposit for the semi-monthly period is at least 95 percent of the net tax liability for the semi-monthly period.
For the semi-monthly period for which the additional deposit is required, the additional deposit must be at least 69.67 percent (63.34 percent non-EFTPS) of the net tax liability for the semi-monthly period. Also, the total deposit for that semi-monthly period must be at least 95 percent of the net liability for the semi-monthly period.
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Blind Credits
If the air carrier elects to report the tax and make deposits based on the alternative (tickets sold) method, Treas. Reg. section 40.6302(c)-3(b)(ii)(2) requires that the carrier separately account for the tax. For each month, the account must reflect all items of tax that are included in amounts billed or tickets sold during the month and items of adjustment relating to the tax for the prior months. The carrier then reports and deposits the net, which is referred to as a "blind credit."
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