Many business aircraft operators make use of the limited options for cost reimbursement provided by the FAA under Part 91, Subpart F of the Federal Aviation Regulations (FARs). These options include timesharing, interchange or joint ownership agreements, affiliated group operations and demonstration flights. Typically, this section of Part 91 only applies to large (12,500 lbs or greater), turbine powered multi-engine airplanes, and fractional program aircraft. One exception is that aircraft, including piston airplanes, small airplanes, and all helicopters operated under the NBAA Small Aircraft Exemption can also make use of these cost reimbursement options.
Flights conducted under timesharing, interchange, or joint ownership agreements, and by affiliated groups all fall under Part 91 of the FARs, meaning that they are noncommercial for FAA purposes. The IRS is not bound by the FAA’s definition of a commercial or non-commercial flight and takes a different view of these operations. This means that even if a flight is conducted under Part 91 of the FARs, it may still be considered commercial by the IRS for Federal Excise Tax (FET) purposes.
When determining if a flight is commercial for FET purposes, the IRS first looks at whether or not any compensation changed hands in exchange for the flight. If the entity in possession, command, and control of the aircraft were to receive compensation for a particular flight, the IRS would most likely deem the operation to be commercial.
Timesharing Agreements 14 CFR §91.501(c)(1)
The amounts paid under a timesharing agreement are subject to the 7.5 percent FET. It is the responsibility of the time sharor (aircraft owner) to collect and remit FET on the amounts paid by the time sharee. The IRS considers the time sharor to have maintained possession, command, and control of the aircraft as both aircraft and crew are being provided to the time sharee in return for compensation.
Interchange Agreements 14 CFR §91.501(c)(2)
Under an interchange agreement, one aircraft is leased in exchange for equal time (a one hour for one hour barter) on another aircraft. The only compensation allowed by the FAA is a payment to make up for any difference that may exist between the cost of owning, operating, and maintaining each aircraft.
The IRS has deemed that interchange agreements constitute commercial transportation as one entity typically provides both aircraft and crew. With interchange agreements, the 7.5 percent FET is computed on the fair market value of the hourly flight time for each aircraft used in the interchange agreement even if no compensation changes hands. (NOTE: FET does not apply only to the amount paid for the interchange agreement.) It is the responsibility of the entity providing the aircraft and crew to collect and remit the FET for a particular flight.
Affiliated Group Operations 14 CFR §91.501(b)(5)
Under certain conditions, use of a business aircraft among affiliated companies may be permitted by the FAA. There must be a proper degree of affiliation between the entities, and the use of the aircraft must be “within the scope of, and incidental to, the business of the company.” If these conditions are met, the FAA allows for inter-company charges on a fully-allocated basis.
For IRS purposes, inter-company charges for affiliated group operations are exempt from FET only if the companies are connected by at least 80% voting stock ownership to a common parent. If this degree of affiliation does not exist, all inter-company charges could be subject to the 7.5 percent FET.
Joint Ownership 14 CFR §91.501(c)(3)
The FAA allows multiple parties to become registered joint owners of an aircraft. The joint owners share the fixed ownership costs associated with the aircraft and individually cover their own direct operating costs. Generally, amounts paid under joint ownership agreements are not subject to FET because each owner retains possession, command, and control of the aircraft for their individual flights. However, if it is found that one owner is retaining too much control over the aircraft, payments could be subject to FET.
Demonstration Flights 14 CFR §91.501(b)(3)
The amounts paid by a prospective purchaser to a seller for demonstration flights are subject to the 7.5 percent FET. If the seller receives payment from the prospective purchaser for the demonstration flight, taxable transportation has occurred. It is the responsibility of the seller to collect and remit the FET.