I’ll never forget the day a client called me in panic. He’d just received an IRS notice for $87,000 in unpaid FET tax on his company’s private jet operations. “George,” he said, “I had no idea I even owed this tax. What the hell is FET, and why didn’t my previous accountant tell me about it?”
That conversation changed how I approach federal excise tax education. Too many business owners discover FET tax the hard way – through IRS notices, audits, or penalties that could have been easily avoided.
FET tax stands for Federal Excise Tax, a consumption tax imposed on specific goods, services, and activities including aviation fuel, air transportation, heavy trucks, alcohol, tobacco, and various other products. Unlike income tax, FET is collected at the point of sale or use, often embedded in the price you pay without realizing it.
Here’s what makes FET particularly tricky: it’s not just one tax, but multiple taxes with different rates, rules, and compliance requirements. The IRS collects nearly $90 billion annually from FET alone, making it a significant revenue source that affects businesses across industries.
Why does this matter to you? Because FET compliance isn’t optional, and the penalties for getting it wrong can devastate your business. Whether you operate aircraft, own heavy vehicles, import goods, or engage in activities subject to federal excise tax, understanding FET isn’t just smart – it’s essential for your financial survival.
Understanding the FET Tax Universe
Most business owners think of taxes in simple terms: income tax, payroll tax, maybe sales tax. But FET operates in a completely different world, with rules that seem designed to confuse rather than clarify.
Federal excise tax applies to dozens of different categories, each with its own rates and regulations. The major categories include:
Aviation FET – This is where I see the most confusion and costly mistakes. The aviation industry faces multiple FET obligations:
- 7.5% tax on domestic passenger transportation
- 6.25% tax on air cargo transportation
- $5.20 domestic segment fee per passenger (increased from $5.00 in 2025)
- $22.90 international departure tax (up from $22.20)
- Fuel taxes on jet fuel and aviation gasoline
Heavy Vehicle FET – If your business uses trucks, trailers, or tractors over certain weight limits, you’re likely subject to a 12% FET on the first retail sale. This tax alone can add over $30,000 to a new heavy truck purchase.
Fuel FET – Gasoline, diesel, and other motor fuels carry federal excise taxes that fund highway infrastructure. The rates vary by fuel type and intended use.
Alcohol and Tobacco FET – These “sin taxes” generate substantial revenue, with cigarettes taxed at about $1.01 per pack and alcohol rates varying by type and proof.
Insurance FET – Foreign insurance premiums face 4% FET on direct premiums and 1% on reinsurance, affecting businesses with offshore insurance arrangements.
The complexity multiplies when you consider exemptions, credits, and special rules for each category. What looks straightforward on paper becomes a maze of regulations in practice.
Aviation FET: Where Million-Dollar Mistakes Happen
Since aviation FET generates the most questions from my clients, let’s dive deep into this area where I’ve seen the most expensive compliance failures.
The fundamental rule sounds simple: if you’re transporting people or property by air for compensation, you owe FET. But defining “compensation” and “transportation” creates endless complexity.
Part 91 vs. Part 135 Operations
Under FAR Part 91 (general aviation), aircraft owners typically pay only fuel taxes. But certain Part 91 flights can trigger the 7.5% transportation tax if they involve compensation or the appearance of commercial activity.
Part 135 charter operations clearly owe the full transportation tax, but even here, the rules contain traps. Who collects the tax? Who remits it? What happens when multiple parties are involved in arranging the flight?
The Aircraft Management Maze
For years, the IRS claimed that aircraft management fees were subject to the 7.5% FET, creating potential retroactive liabilities in the millions for management companies. The Tax Cuts and Jobs Act of 2017 finally clarified that aircraft owners paying management companies for services supporting their own flights don’t owe the transportation tax.
But the relief is narrow. The exemption applies only when the aircraft owner directly pays the management company. If a related company, single-member LLC owner, or family member makes the payment, the exemption may not apply, potentially triggering FET liability.
Trust Arrangements and Ownership Structures
Many aircraft are owned through trusts for regulatory or liability reasons. The IRS final regulations in 2021 confirmed that the FET exemption covers owner trust arrangements, but the rules around who qualifies as the “aircraft owner” remain restrictive.
International Operations
International flights add another layer of complexity. The “225-mile zone” rule affects when international head taxes apply. Determining which segments of an international trip are subject to the 7.5% domestic tax requires careful analysis of departure and arrival points.
Heavy Vehicle FET: The 12% Surprise
The federal excise tax on heavy trucks, trailers, and tractors often blindsides business owners who don’t expect a 12% tax on top of their vehicle purchase price.
What Triggers the Tax?
FET applies to the first retail sale of:
- Trucks and truck chassis with a gross vehicle weight over 33,000 pounds
- Trailers and semi-trailers with a gross vehicle weight over 26,000 pounds
- Tractors designed for highway use
The 12% rate applies to the total sales price, including parts and accessories sold in connection with the vehicle. This can add $30,000 or more to a major truck purchase.
Exemptions and Exclusions
Several exemptions can reduce or eliminate the tax:
- Sales for further manufacture or export
- Sales to state and local governments
- Certain agricultural and off-highway vehicles
- Specific vehicle types meeting size and capacity restrictions
The key is understanding these exemptions before the purchase, not after receiving the tax bill.
Used Vehicle Advantage
Here’s a crucial planning point: FET applies only to the first retail sale. Buying used vehicles avoids FET entirely, potentially saving tens of thousands of dollars while still getting a quality vehicle with warranty coverage.
Fuel FET: Hidden Taxes in Every Tank
Every time you fuel up, you’re paying federal excise tax, but most business owners don’t realize they might be eligible for credits or refunds in certain situations.
Current Fuel Tax Rates (2025)
- Gasoline: $0.184 per gallon
- Diesel fuel: $0.244 per gallon
- Jet fuel: $0.244 per gallon
- Alternative fuels: Various rates
Off-Highway Use Credits
If you use fuel for off-highway business purposes – construction, farming, forestry, or other qualifying activities – you may be entitled to refunds of the highway portion of the fuel tax. Many businesses miss these opportunities because they don’t track fuel usage by purpose.
Aviation Fuel Considerations
Aviation fuel taxes support the Airport and Airway Trust Fund, but certain operations may qualify for exemptions or reduced rates. Understanding when and how these apply requires careful analysis of your specific operations.
FET Compliance: Forms, Filing, and Penalties
FET compliance involves multiple forms and deadlines, each with severe penalties for failures.
Form 720: Quarterly FET Return
Most FET obligations are reported on Form 720, filed quarterly. The form covers multiple tax types, making it easy to miss required line items or calculation errors.
Key compliance requirements include:
- Quarterly filing by the last day of the month following the quarter
- Semi-monthly deposits for larger tax liabilities
- Electronic filing requirements for most filers
- Detailed record-keeping supporting all calculations
Registration Requirements
Many FET activities require advance registration with the IRS. Operating without proper registration can result in additional penalties and compliance complications.
Penalties and Interest
FET penalties are severe:
- Failure to file: 5% per month, up to 25% of the tax owed
- Failure to pay: 0.5% per month, up to 25%
- Failure to deposit: 2% to 15%, depending on the delay
- Interest on all unpaid amounts at federal rates
Strategic FET Planning Opportunities
Smart business owners don’t just comply with FET – they plan around it to minimize their tax burden legally and efficiently.
Timing Strategies
Understanding when FET obligations arise can create planning opportunities. For example, the timing of heavy vehicle purchases, fuel purchases for inventory, or aviation operations can affect which tax year bears the FET burden.
Structure Optimization
How you structure ownership and operations can significantly impact FET obligations. Aircraft ownership through appropriate entities, proper management agreements, and careful attention to who makes payments can avoid unexpected tax liabilities.
Credits and Refunds
Many businesses miss opportunities to claim FET credits or refunds for:
- Off-highway fuel use
- Exported products
- Qualifying agricultural operations
- Certain manufacturing activities
Red Flags That Trigger FET Audits
The IRS targets certain patterns that suggest FET compliance problems:
Aviation Red Flags
- Inconsistent treatment of management fees
- Large fuel purchases without corresponding FET deposits
- Related party transactions involving aircraft
- International operations without proper tax documentation
Heavy Vehicle Red Flags
- Large equipment purchases without FET payments
- Claiming exemptions without proper documentation
- Inconsistent reporting between federal and state returns
Fuel Tax Red Flags
- Large refund claims without supporting documentation
- Inconsistent fuel usage patterns
- Missing semi-monthly deposits despite large fuel purchases
The Cost of Getting FET Wrong
FET mistakes aren’t minor accounting errors – they’re business-threatening events. I’ve seen companies face:
- Retroactive assessments reaching hundreds of thousands of dollars
- Penalties and interest doubling the original tax liability
- Criminal investigations for willful failures to pay or report
- Business disruption from IRS enforcement actions
The aviation industry faces particular risk because of the high dollar amounts involved. A single aircraft transaction can generate tens of thousands in FET liability, making compliance errors extremely expensive.
Building Your FET Compliance System
Effective FET compliance requires more than quarterly form filing – it demands integrated systems that track your FET obligations in real-time.
Essential Components
- Automated tracking systems that flag FET-triggering transactions
- Regular compliance reviews by tax professionals familiar with FET
- Documentation protocols that support all tax positions
- Relationship management with qualified service providers
Professional Support
FET compliance isn’t a DIY project. The rules are too complex, the penalties too severe, and the planning opportunities too valuable to handle without expert guidance.
Work with CPAs who regularly handle FET matters, not generalists who treat it as an afterthought. The cost of proper guidance is always less than the cost of getting it wrong.
Your Next Steps
FET tax compliance can’t wait for tax season or quarterly deadlines. Every business transaction potentially triggers FET obligations, making ongoing compliance essential.
Immediate Actions
- Audit your current operations for FET obligations you might be missing
- Review your tax structure to ensure optimal FET treatment
- Implement tracking systems that identify FET-triggering events
- Establish relationships with qualified FET professionals
Long-term Strategy
FET planning should integrate with your overall tax strategy. The savings from proper planning often exceed the compliance costs many times over, making FET expertise an investment, not an expense.
Don’t wait for an IRS notice to discover your FET obligations. The time to act is now, while you still have control over your compliance approach and planning opportunities.
The businesses that thrive under FET complexity are those that understand the rules, plan ahead, and maintain rigorous compliance systems. Those who ignore FET requirements face an uncertain future where IRS enforcement actions can destroy years of business success.
Which category will your business fall into? Contact us today to learn more.