In 2008, the Internal Revenue Service published a revised version of its Air Transportation Excise Tax Audit Technique Guide, a reference for field auditors. IRS agents began using the guide to assess federal excise taxes on aircraft-management companies. In March, the IRS chief counsel’s office advised the agency that the federal excise tax of 7.5 percent applies to the management fees and other payments that aircraft owners make to aircraft-management companies. These include payments for pilot services, maintenance services, scheduling services, and other management services. The National Business Aviation Association and the National Air Transportation Association are negotiating with the IRS to change this policy. If the policy remains in place, says Ed Kammerer, a partner in the law firm of Hinkley, Allen & Snyder, aircraft owners who use management companies likely will bear the brunt of the tax. Most management agreements contain a significant indemnification clause that will allow companies to be reimbursed by customers if they are hit with an excise tax.
The excise tax will be 7.5 percent. That could be 7.5 percent of the management fee plus all costs associated with operating the plane if those costs are covered by the management company: insurance, pilot salaries, maintenance service.
A customer typically hires a manager to take care of everything associated with the plane because the manager is better at doing that than the customer is: paying and training pilots, fuel costs, hangar fees, maintenance. The customer tells the manager to get a number at the end of the month, and that’s the fee that’ll be paid. That’s the number that could be taxed at 7.5 percent.
A solution is to distinguish your agreement from the type that the IRS is going after. You make it clear that the management company is an agent, not a service provider. Instead of you paying the management company, it passes the bills on to you. Or it pays from an account that you set up. Either solution might not be bulletproof.
As an owner, you need to protect yourself, because it’s open season on management companies in terms of audits. If you’re an owner, you want to know if an audit is ongoing. And if an audit involves your contract, you want to be involved with that. You want to be able to make a case in your defense, because, as I said, the overwhelming majority of management contracts include broad indemnity clauses that will allow the company to pass on the cost of an excise tax to you.
Private aviation is an easy target for the feds. The excise tax could affect a large number of aircraft owners and operators, and for those impacted, it could be a significant cost factor.