NAAA actively monitors federal legislation and regulations pertaining to the Internal Revenue Code and attempts to affect, where appropriate, tax relief to aerial application operations nationwide due to such operations not utilizing federal aviation services, such as not commonly flying in controlled airspace monitored by air traffic control and/or not typically operating out of federally funded airports but instead out of private landing strips.
In July 2005, NAAA successfully lobbied Congress to enact legislation providing more than $4 million in additional annual federal fuel tax relief for U.S. aerial applicators. The new law ended the requirement for aerial applicators to obtain waivers from their farmer-customers to qualify for fuel excise tax-relief. In addition, the law enabled aerial applicators relief from federal excise taxes associated with fuels consumed while ferrying to apply to cropland to and from an agricultural application facility.
Federal excise taxes levied on fuels used on a farm for farming purposes, such as fuel used in the application of fertilizers, seeds, pesticides or other substances, including aerial applications, qualify for either a full tax credit or refund. The updated IRS reference that explains the rules and procedures to follow in taking these fuel tax credits and refunds is IRS Publication 510-Excise Taxes, specifically Chapter 2 of the document see. IRS Publication 225-Farmer’s Tax Guide, also provides instructions explaining the rules and procedures to follow in taking these credits and refunds, specifically Chapter 14 on Excise Taxes.
The rules for taking tax credits or refunds are different depending on the fuel used. As stated in IRS Publication 510 and 225, for aviation gasoline, the aerial applicator may claim a tax credit as the ultimate purchaser of the fuel but cannot claim a refund. Aviation gasoline users may take a tax credit using IRS Form 4136, Credit for Federal Tax Paid on Fuels. The instructions for IRS Form 4136 may be found here.
According to IRS Publication 510, “for kerosene used in aviation [Jet A], the ultimate purchaser may make the claim or waive their right to make the claim to the registered ultimate vendor [fuel supplier].” A registered ultimate vendor may sell kerosene used in aviation free of excise taxes and make the claim with the IRS himself—if he chooses to do so; however, he is not obligated to do this. For the registered ultimate vendor to make this claim he must obtain a waiver from the ultimate purchaser. A sample waiver is included as Model Waiver L in the Appendix of IRS Publication 510. The registered ultimate vendor must have the waiver at the time the credit or payment is claimed. Only an ultimate vendor who is registered can make these claims. Registration requirements are partially explained on pg. 5 of IRS Publication 510. If the ultimate purchaser of kerosene does not waive his right to make the claim from an ultimate vendor, he may make a claim for a refund on the excise tax on fuel himself using IRS Form 8849, Schedule 1 see.The IRS recommends tax filers making these claims keep the following records at their principal place of business:
- the total number of gallons bought and used during the period covered by the claim;
- the dates of the purchases;
- the names and addresses of suppliers and amounts bought from each during the period covered by your claim;
- the nontaxable use for which you used the fuel; and
- the number of gallons used for each non-taxable use.
As aforementioned, NAAA was successful in providing aerial applicators full relief from the federal excise taxes levied on both aviation gasoline and kerosene used in aviation. This includes, according to IRS Publication 510, “fuel used by an aerial applicator for the direct flight between the airfield and one or more farms.” These taxes levied on fuels “ferrying to and from the field” did not qualify for tax relief prior to 2005. It was NAAA’s federal lobbying efforts that allowed for this and the elimination of the farmer waiver provisions. NAAA’s fuel tax relief efforts have saved the aerial application industry approximately $20 million per year.
The purpose of the fuel tax is to generate revenue for the Airport Improvement Program, which builds new and retrofits and expands existing public airports. Justification for exemption stems from the fact that the vast majority of the 1,350 aerial application businesses in the U.S seldom use public use airports or the air traffic control system, if at all; hence it would be unfair for them to pay such a tax. Furthermore, if an aerial applicator were to use a public airport, the FAA has established rules and regulations [see FAA’s Airport Compliance Handbook (Order 5190.6A)] providing guidance for these public airport entities to recover costs through fees and other charges to make the airport self-sustaining. Aerial applicators are charged these fees if they use these airports. Aerial applicators also rarely, if ever, use or show up on the nation’s air traffic control system network because they are restricted category aircraft that fly at low altitudes in rural un-congested airspace.
NAAA successfully prevented any changes from being made to the fuel tax exemption for aerial applicators during the Republican tax overhaul in December 2017. However, the fuel tax exemption could become a target as congress looks wherever they can to increase revenues to address the massive federal debt. NAAA will continue to work vigorously to preserve this important exemption for ag aviators.
In December 2017 Congress passed the first fundamental overhaul of the tax code since 1986, cutting the corporate tax rate from 35 percent to 21 percent. NAAA was successful in urging that the law include extension of equipment-purchasing-friendly depreciation schedules. The law allows for a temporary 100 percent depreciation deduction through 2026 (through 2027 for longer production period property and certain aircraft). What was a 50-percent allowance is increased to 100 percent for property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The 100-percent allowance is phased down by 20 percent per calendar year for property placed in service.
Additionally, the maximum amount an individual can deduct for new asset purchases, like an ag aircraft, tractor or combine, has been raised to $1 million, up from $500,000 under the previous law. The provision also expands the definition of qualified real property eligible for section 179 expensing to include any of the following improvements to nonresidential real property placed in service after the date such property was first placed in service: roofs; heating, ventilation and air-conditioning property; fire protection and alarm systems; and security systems. This provision applies to property placed in service after Dec. 31, 2017.
Most farmers and farm service providers are familiar with Section 179 and bonus depreciation. Essentially, both these tools allow additional deductions upfront on an asset. For example, the purchase of $100,000 of used equipment, without the use of Section 179 or bonus depreciation, would be depreciated over a seven-year period. Only $1.08 million of Section 179 can be used in 2022 (up to a $2.7 million threshold). Bonus depreciation has no dollar limitation on how much can be taken. Also, Section 179 can be applied to some of the asset’s purchase, whereas bonus depreciation applies to the entire asset.
For example, a farmer can decide to take only $40,000 of Section 179 on that $100,000 asset mentioned above, leaving $60,000 of the purchase to be depreciated over a seven-year period. If bonus depreciation was used, the entire $100,000 would be depreciated in the first year, leaving nothing for future years.
Next year, 2023, there will still be the flexibility to decide what tools to use, but, unless Congress acts, the calculation will get harder because of a phasedown of bonus depreciation. In 2023 it will only be 80% and it will drop after that according to the following schedule: 60% in 2024; 40% in 2025; 20% in 2026; 0% after Dec. 31, 2026.
Also, as part of the tax code overhaul in 2017 the estate tax exemption has been doubled from $5 million to $10 million for estates passed on between Dec. 31, 2017, and Jan. 1, 2026. This is an important exemption for the next generation of farmers and ag aviation operations who would otherwise need to sell off land or expensive equipment to cover estate taxes.
Updated February 2023
This above is not intended for publication. NAAA requests that should any party desire to publish, distribute or quote any part that they first seek the permission of the Association.