United States

Treasury issues proposed air transportation excise tax regulations

TAX ALERT  | 

On July 29, 2020, the Treasury Department released proposed rules (REG-112042-19, RIN 1545-BP37) on air transportation excise taxes. These regulations provide detailed guidance to implement the tax exemption for payments made by aircraft owners to aircraft management companies for maintaining private aircrafts for individuals and businesses. This exemption was enacted as part of the Tax Cuts and Jobs Act (TCJA) tax reform legislation. The regulations also overhaul existing regulations to cleanup outdated provisions and update rules consistent with previous statutory changes.

The TCJA enacted a provision exempting from excise tax payments to aircraft management companies by aircraft owners, such as businesses with private planes. The proposed regulations provide rules implementing this provision. 

Highlights from the 54-page proposed regulations include:

  • Clarification that the former “possession, command, and control” test does not apply if payments to aircraft management companies are exempt from tax,
  • A Narrower definition of the term aircraft owner such that payments to aircraft management companies by related corporations or family members of the aircraft owner may be taxable,
  • Confirmation that the excise tax rules do not distinguish treatment based on choice of flight – i.e., whether the aircraft is operated under FAA Part 91 or Part 135,
  • Clarification that an owner’s exemption from tax applies even if the aircraft is partially operated for taxable charter flights,
  • New definitions of the terms private aviation and substitute aircraft,
  • An anti-abuse rule to prevent avoidance of the fuel surtax by fractional aircraft ownership programs.

The regulations also revise certain procedural rules, update outdated provisions, and incorporate provisions enacted since the regulations were last revised in 1962. 

Due to COVID-19 and the aviation tax holiday enacted by the CARES Act, the air transportation excise tax is not currently in effect. The preamble to the proposed regulations states that most provisions in the regulations, if finalized, would not take effect before Jan. 1, 2021 – the date the aviation tax holiday is currently set to expire. 

Washington National Tax Observations

The regulations generally follow the TCJA provision and conference report. 

One of the biggest takeaways from the proposed regulations is the government’s limited interpretation of who is an “aircraft owner.” While not unexpected, the government declined to expand the definition to include payments to the aircraft management company by related companies in the corporate family, or by persons such as family members of the aircraft owner. Thus, payments by these non-aircraft owners may be taxable. This is significant because businesses have different structures and agreements among the parties related to use of the company aircraft; thus, companies must scrutinize their agreements to determine whether any of their payments will be taxable if and when these rules are finalized.

It should not go unnoticed that the regulations also overhaul the existing air transportation regulations. It has been nearly 60 years since these regulations were last revised. The government has proposed a major clean-up of the outdated regulations and also incorporation of a number of new provisions that have been enacted over the years. 

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