There are some exemptions from commercial taxes. They include: small aircraft weighing less than 6,000 pounds; helicopters used in the exploration or development of hard minerals, oil or gas, or forestry operations; and emergency medical flights.
She clarifies, “If a flight is scheduled to transfer a patient, it’s probably not an emergency.” Obtaining a note from the physician stating that it is an emergency is good to have in case of an IRS audit. Transportation of an organ is considered transportation of property and falls under those FET guidelines.
Sanders-Stubbs says confusion arises when operators don’t understand how the exemption works or how narrow it is. Even if the aircraft is less than 6,000 pounds, it is subject to FET if it is following an established route.
Commercial FET applies to demo flights, state taxes, layover time and expenses of crew, flight training (if they are employees of someone else), landing and parking fees.
FETs on demonstration flights can be avoided, says Sanders-Stubbs, if the charges for the flight are applied after the aircraft is purchased.
“All these rules are for the airlines,” says Sanders-Stubbs. “DOT is trying to apply these rules to air charter.”
For brokered flights, she offers the following example for calculating the FET: For a $1,000 charter, if the broker charges $1,100, FET is due on the full amount. If the broker charges $1,000 for the flight, and $100 for the commission is separately stated, FET is only due on $1,000. The operator who carries the passenger is generally responsible for collecting and remitting the FET.
IRS Audit: What To Expect
According to Sanders-Stubbs, the IRS feels there is a high degree of noncompliance within the air charter and business aviation community. Primarily, she says, this is because agents don’t understand general aviation and, typically, rulings are written for the airlines.
There are several ways operations can be flagged for an audit, according to Sanders-Stubbs. They include: referral from income tax examiner; examination of tax documents; claims for refunds; complaint from an unhappy customer; airport registers; invoices; advertisements; and examinations of other taxpayers (somebody you have a business relationship with got audited).
In advance of the audit, the taxpayer will receive a letter from the IRS and/or a questionnaire. “They don’t just show up on your doorstep,” says Sanders-Stubbs.
IRS auditors will ask for a variety of documents. Sanders-Stubbs advises that the following be readily available: excise/income tax returns; source date for Form 720, aircraft logs; accounting ledgers; insurance policy (who is named, what is covered); FAA bill of sale; and aircraft agreements (all management and operation control agreements).
Adds Sanders-Stubbs, “The IRS does not understand the mix of 91 and 135. They will assume everything is FET-able. It’s your job to prove it’s not.”
During an audit, the IRS will review a charter company to determine the type of services provided, create a list of aircraft owned and provided by the charter company, review logs looking for untaxed flights, as well as ask to see any lease agreements.
For active Form 720 filers, the statute of limitations for the IRS is three years. However, if the company is not an active filer, IRS auditors can go back as far as they want, says Sanders-Stubbs. Another tip: if you have a blank line on a form, write N/A or cross through it to clarify that it was not overlooked.
When dealing with the IRS, Sanders-Stubbs recommends providing the auditor all the materials requested, but one is not required to volunteer any information. The audited company also has the right to ask questions. “Have them explain it so you understand it,” she says. “Don’t be intimidated.”
Most importantly, Sanders-Stubbs recommends businesses assume they will be audited at some point and to be prepared. “Document everything and get signatures.”
This year's Commercial Operators Tax Seminar ("Tax Seminar") will be held in Ft. Lauderdale, Florida, on Aug. 23-24, 2011.
They are partnering again this year to offer the Commercial Operators Tax Seminar, titled, “Back to Basics”. This year's Tax Seminar will be held in Oak Brook, IL, on August 6-7, 2013.
The Tax Seminar will be held in Scottsdale, Arizona, on August 7-8, 2012.
NBAA has compiled the latest information from the IRS and other resources on how FET applies to commercial air transportation of passengers, including the percentage tax on domestic travel and related...