Victory for Business Aviation in Final IRS Rules for Management Companies
/Building on the National Business Aviation Association’s (NBAA’s) successful advocacy efforts for business aviation during the passage of the Tax Cuts and Jobs Act (TCJA), the association has led an industry regulatory effort to provide certainty and clarity for aircraft management companies and owners regarding their federal excise tax (FET) obligations.
In 2017, following a years-long advocacy campaign led by NBAA, lawmakers introduced key tax reforms, such as 100% bonus depreciation for new and pre-owned property, including business aircraft. The TCJA also made clear the 7.5% FET on commercial air transportation is not due when owners conduct flights on their own aircraft with a management company’s assistance. The legislative provision explained that such flights are subject to the non-commercial fuel tax and exempt from the percentage tax ending significant uncertainty that had devastating impacts for aircraft management companies.
Since this legislative victory, NBAA and its Tax Committee – led by Chair John Hoover, a partner with the law firm of Holland & Knight LLP – championed industry efforts to work with the Department of the Treasury and IRS on regulations that correctly implement the TCJA management company provision. That effort has now resulted in a final rule from the IRS that represents the successful conclusion of the NBAA-led campaign to prevent the improper and retroactive application of FET to management companies and aircraft owners.
In its final rule, the IRS adopted several significant changes suggested by NBAA to eliminate potential confusion and provide clear standards for taxpayers and the government. For example, the rule affirms that owner trust arrangements, used to register thousands of business aircraft for regulatory compliance purposes, are eligible for the FET exemption. Also, at NBAA’s urging, the final regulations abandon a proposal to expand the definition of leases disqualified from the FET exemption, which would have severely limited the exemption’s application to many common aircraft ownership structures.
Also, in response to NBAA’s comments, the final rule eliminates a complicated allocation method that would have been required when owners take flights on a substitute aircraft. Instead, only the fair market value of those specific charter flights involving substitute aircraft will generally be subject to FET. The final rule also clarifies that aircraft owners qualify for the FET exemption regardless of whether they conduct flights on their own aircraft under Part 91 or Part 135 of the Federal Aviation Regulations.