Editor: Lori Anne Johnston, CPA, J.D.
Many businesses own a private plane within their corporate organization for business use. While some companies employ a pilot and manage aircraft operations themselves, many engage the services of an aircraft management company. These companies provide pilots, hangars, maintenance, flight planning, and other services related to operating an aircraft. Over the years, there has been uncertainty as to whether payments by a business to the aircraft management company were subject to the 7.5% federal excise tax imposed on taxable transportation of persons by air under Sec. 4261.
The law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, responded to this uncertainty by enacting a narrow excise tax exception for amounts that are paid by an "aircraft owner" for aircraft management services related to maintenance and support of the owner's aircraft or flights on the owner's aircraft (Sec. 4261(e)(5)(A)). Sec. 4261(e)(5)(B) defines the term ''aircraft management services'' to include assisting an aircraft owner with: (1) administrative and support services, such as scheduling, flight planning, and weather forecasting; (2) obtaining insurance; (3) maintenance, storage, and fueling of aircraft; (4) hiring, training, and provision of pilots and crew; (5) establishing and complying with safety standards; and (6) such other services as are necessary to support flights operated by an aircraft owner.
In January 2021, Treasury released final rules (T.D. 9948) on the Sec. 4261(e)(5)(A) exemption for payments made by aircraft owners to aircraft management companies. The regulations provide definitions and rules aimed at implementing this provision. The regulations also address issues with the existing regulations — which have not been updated since 1962 — by cleaning up outdated provisions and updating rules for consistency with previous statutory changes.
This discussion addresses the key provisions in the regulations implementing the new aircraft management company exemption.
Sec. 4261(a) imposes a collected excise tax on certain amounts paid for transportation by air. For domestic flights, tax is imposed on the amount paid for "taxable transportation." The person making the payment is the taxpayer, and the person receiving the payment is responsible for collecting the tax and paying it over to the IRS. The tax is 7.5% of the amount paid plus a per person segment tax. For flights that do not meet the definition of taxable transportation, Sec. 4281(c) imposes a per person international arrival/departure tax.
Possession, command, and control
For Sec. 4261 to apply, a payment must be made to the person providing the taxable transportation. That person must have "possession, command, and control" of the aircraft for the payment to be taxable. There are many rulings defining the term "possession, command, and control." Under these rules, the aircraft management company meets the possession, command, and control test; thus, arguably, payments made to the management company could be deemed as taxable. The new regulations, however, clarify Treasury's view that the possession, command, and control test is not relevant with regard to the Sec. 4261(e)(5) exemption, as the new Code provision addresses the taxability issue outright.
One of the most significant issues in the new regulations relates to the definition of "aircraft owner," as only payments from an aircraft owner to an aircraft management company are exempt from tax. In general, the regulations define "aircraft owner" as an individual or entity that leases or owns (that is, holds title to or substantial incidents of ownership in) an aircraft managed by an aircraft management services provider (Regs. Sec. 49.4261-10(b)(3)).
The regulations provide that related-party payments should not be treated as "amounts paid by an aircraft owner" for purposes of the Sec. 4261(e)(5) exemption. In other words, a related party's payments are not eligible for the excise tax exemption. Instead of treating payments made by related parties as amounts paid by the aircraft owner, the regulations take a narrow view of the definition of aircraft owner, due to existing regulations that treat disregarded entities as separate from their owners for purposes of federal excise taxes. The exemption does not apply to amounts paid on behalf of an aircraft owner (other than in a principal-agent scenario). Specifically, payments for aircraft management services by a member of an affiliated group for flights on an aircraft owned by another member of the group are not treated as payments by the aircraft owner (Regs. Sec. 49.4261-10(a)(1)). The regulations do provide that beneficiary-owner trust arrangements generally qualify as aircraft owners.
There is no single way in which companies structure ownership of the plane within the corporate family; many business considerations are taken into account such as sales tax, liability protection, and other issues that result in payments from multiple parties to the aircraft management company. If the payment is not from the immediate owner of the aircraft, it would generally be taxable under the regulations. For example, if an aircraft is owned by a single-member LLC or a qualified Subchapter S subsidiary (QSub), the following payments to the aircraft management company would be taxable:
- Payments made by the owner of the single-member LLC or QSub;
- Payments made by a brother-sister company; and
- Payments made by an individual such as the founder of the company or other family members.
Choice of flight
Aircraft owners can choose to operate their aircraft under either Federal Aviation Regulation Part 91 (general aviation, 14 C.F.R. Part 91) or Part 135 (on-demand and commuter flights, 14 C.F.R. Part 135). Commenters requested guidance in this area because of a debate about whether aircraft owners operating their aircraft under Part 91 would be eligible for the Sec. 4261(e)(5) exemption but those operating aircraft under Part 135 would not be. The regulations clarify that regardless of which part of the Code of Federal Regulations the aircraft owner's aircraft is operating under, it will have no effect on the application of the Sec. 4261(e)(5) exemption (Regs. Sec. 49.4261-10(d)). This is consistent with existing excise tax rules under Sec. 4261 generally.
The regulations clarify that the Sec. 4261(e)(5) exemption is not affected by an aircraft owner permitting a charter operator to use the aircraft owner's aircraft for charter flights (Regs. Sec. 49.4261-10(e)(1)). Treasury recognizes that it is common practice for aircraft owners to allow a charter operator to use the aircraft, for a fee, when it would otherwise be idle or repositioned for the owner. In those instances, the amounts paid for the charter flights operated on the aircraft owner's aircraft are subject to air transportation excise tax under Regs. Sec. 49.4261-7(h). However, the charter of an aircraft does not change the character of the aircraft owner's payments to the aircraft management company; these payments remain exempt.
The Sec. 4261(e)(5) exemption is limited to private aviation (Regs. Sec. 49.4261-10(a)(2)). The regulations provide a definition for the term "private aviation" to mean the use of an aircraft for civilian flights except scheduled passenger service for which tickets are sold on a seat-by-seat basis to the general public (Regs. Sec. 49.4261-10(b)(8)).
The Sec. 4261(e)(5) exemption is limited by Sec. 4261(e)(5)(D), which provides that the exemption must be allocated pro rata when the aircraft owner has paid amounts for aircraft management services related to flights on the owner's aircraft but also flights on a substitute aircraft owned by someone else. The regulations define substitute aircraft as an aircraft, other than the owner's aircraft, that is provided by the aircraft management services provider to the owner when the owner's aircraft is not available (Regs. Sec. 49.4261-10(b)(9)). The statute and regulations require that a pro rata allocation be made when a substitute aircraft is provided (Regs. Sec. 49.4261-10(c)).
Taxability depends on use agreements
The regulations generally follow the statute and conference report. One of the biggest takeaways is Treasury's limited definition of who is an aircraft owner. While not unexpected, Treasury declined to expand the definition to include payments to the aircraft management company by related companies in the corporate family, by individuals who own their aircraft through a single-member LLC, 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. Other important issues addressed by the regulations relate to the rules for charters when the owner is not operating the aircraft and the rules related to substitute aircraft.
Additionally, while beyond the scope of this discussion, it should not go unnoticed that the regulations also overhaul the existing air transportation regulations. It has been over 60 years since these regulations were updated. Treasury has performed a major cleanup of the outdated regulations and also incorporated a number of new statutory provisions that have been enacted over the years.
Lori Anne Johnston, CPA, J.D., is a manager, Washington National Tax for RSM US LLP.
For additional information about these items, contact the authors at Trina.Pinneau@rsmus.com or Deborah.Gordon@rsmus.com.
Contributors are members of or associated with RSM US LLP.