When the 2017 Tax Cuts and Jobs Act (the "Act") became law, its provisions immediately and significantly impacted business aircraft owners and operators in a number of ways. One of the key provisions of the Act resolved an issue between the IRS and aircraft management companies. Prior to the Act, the IRS was taking the position that fees paid for aircraft management services were subject to Federal Excise Tax ("FET"). Of course, the business aviation community objected to the IRS's position. As a result of the ongoing dispute (and discussions aimed at obtaining guidance from the IRS and/or changing its position), although the IRS had audited aircraft management companies and assessed FET, it was not attempting to enforce those assessments.
The Act addressed this situation and now provides a specific exemption to FET for aircraft management services. The following amounts paid by an aircraft owner for management services related to maintenance and support of the owner’s aircraft or flights on the owner’s aircraft are exempt from FET:
Payments for support activities related to the aircraft itself (e.g. storage, maintenance, and fueling);
Payments for the aircraft’s operation (e.g. hiring and training of pilots and crew);
Payments for administrative services (e.g. scheduling, flight planning, weather forecasting, obtaining insurance, establishing and complying with safety standards); and
Payments for other services as are necessary to support flights operated by an aircraft owner.
It is important to keep in mind that these payments are exempt from FET only to the extent that they are attributable to flights on an aircraft owner’s own aircraft. Payments for services that apply to other aircraft in addition to the aircraft owner’s aircraft are still subject to Federal excise tax. Also, to the extent that monthly payments are allocated to flights on the aircraft owner’s aircraft and other non-owned aircraft, then FET must be collected on the portion of the payment attributable to flights on the non-owned aircraft.
But, you might be wondering, what about the many aircraft owned by single-purpose entities and leased to operating companies who operate the aircraft in connection with their businesses? How does the Act affect the operating company lessees? Well, with respect to aircraft lessees, the Act considers an aircraft lessee to be an aircraft owner to which the exemption is available provided that the lease is for a term of more than thirty one (31) days and the aircraft is not leased from the aircraft management company or a related party.
So, within the parameters of the Act, we now have clarity on when payments for aircraft management services are, and are not, subject to FET.