If you’re running a company, you know that there are plenty of forms that you need to file regularly to the IRS. Depending on the nature of your business, you might be liable to pay excise taxes and file Form 720 to the IRS.
This form is used by businesses that deal with certain products or services. It helps you report and pay special taxes, known as excise taxes, to the government.
In this article, we’ll explain what Form 720 is about, who should use it, and the parts and taxes this form entails. This guide is designed to make tax time less stressful for you as a business owner, ensuring you know your tax duties and how to meet them without a headache.
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What is IRS Form 720?
IRS Form 720 is known as the Quarterly Federal Excise Tax Return. This form is used by businesses to tell the IRS (Internal Revenue Service) about the special taxes, called excise taxes, they’ve collected from selling certain goods and services, such as fuel, airline tickets, and even indoor tanning sessions.
The form is filled out quarterly, meaning every three months. This regular reporting helps businesses keep track of the taxes they’ve collected and need to pass on to the IRS.
Since the form deals with a range of different products and services, each with its own tax rate and rules, it’s important for businesses to be accurate and detailed in their reporting.
What are excise taxes?
Excise taxes are a type of tax charged on specific goods, services, and activities. Unlike sales taxes that are applied broadly to most items we buy, excise taxes target specific products or services. The key idea here is that these taxes are directly linked to certain types of purchases or activities. Let’s look at how excise taxes typically work.
Tax on specific goods and services
Excise taxes are usually added to things like gasoline, tobacco, alcohol, or airline tickets. For example, when you fill up your car with gas, a part of what you pay is an excise tax for the fuel. Similarly, when you buy a pack of cigarettes or a bottle of alcohol, a portion of the price includes excise tax.
Please note that while there are federal excise taxes on alcohol and tobacco, you don’t file the forms with the IRS but with TTB.
Why this tax is charged?
The reason behind excise taxes can vary. Often, they’re used by governments to discourage the use of products that can be harmful, like tobacco or alcohol (known also as sin taxes). In other cases, they can help fund specific government programs or services. For example, excise taxes on fuel often go towards maintaining roads and transportation infrastructure.
Are excise taxes collected only on the federal level?
No, excise taxes are not only collected at the federal level; they can also be imposed by state and local governments. While IRS Form 720 is specifically for federal excise taxes, many states and localities have their own excise taxes on similar or additional goods and services.
How is excise tax calculated?
Excise taxes come in two types:
- Ad Valorem Taxes: These are taxes charged as a percentage of the price of certain goods or services. For example, if a product has an ad valorem tax of 10%, and the product costs $100, the tax would be $10.
- Specific Taxes: These are taxes charged as a fixed dollar amount on certain items. This means no matter the price of the item, the tax amount stays the same. For instance, a specific tax might add $2 to the cost of an item, regardless of the item’s original price.
Impact on prices
Excise taxes are usually (but not always) included in the price you pay for the product. So, the price tag you see for a gallon of gas or a pack of cigarettes has the excise tax already factored in.
Who needs to file Form 720?
Those who are liable to pay excise tax need to file the Form 720. The list of possible entities like producers, manufacturers, retailers, and importers that fall into this category is exceedingly long, that’s why the IRS advises the following:
If you were in charge of paying or collecting any federal excise taxes mentioned in Parts I and II of Form 720 for a previous quarter and haven’t submitted a final tax return yet, or if you are currently responsible for these taxes in the ongoing quarter, you need to file Form 720.
The form itself has over 50 different categories of excise taxes, that’s why business owners often seek professional help when filling out IRS Form 720, especially if they are new to the process or if their business deals with a wide range of taxable products and services. Professionals like tax accountants or tax attorneys have the expertise to navigate these complexities.
When and how to file Form 720?
IRS Form 720 is due four times a year as outlined by the IRS. The deadlines for these quarterly filings are fixed:
- April 30 for the January-March quarter;
- July 31 for the April-June quarter;
- October 31 for the July-September quarter;
- January 31 for the October-December quarter.
Please note that if the due date falls on a weekend or a public holiday, the deadline moves to the next business day.
Electronic & paper filing options
You have two ways to file Form 720: electronically (online) or the traditional paper form. The IRS encourages electronic filing because it’s faster and more secure.
Form 720 can be filed online using services of electronic return originators (EROs), transmitters, or intermediate service providers (ISPs) that are part of the IRS e-file program specifically for excise taxes.
If you prefer paper filing, you can still mail in your form. However, remember that mailing can take longer, and there’s always a risk of delays or lost mail.
How do you pay the federal excise tax?
Businesses are required to make excise tax deposits twice a month or as it’s called semi-monthly. The first period covers the 1st to the 15th of the month, and the second period covers the 16th to the end of the month.
It’s worth noting that there are exceptions to this rule. For other exceptions or special circumstances please check with the IRS.
What’s important is how you pay those taxes. To make federal excise tax deposits, businesses should use electronic funds transfer through the Electronic Federal Tax Payment System (EFTPS). They need to initiate these electronic deposits at least one day before the due date, and no later than 8:00 p.m. Eastern time. If they miss this deadline, they can opt for a same-day wire transfer from their bank, although this might involve additional fees.
Penalties for late filing or non-compliance
If the IRS sends you a notice about a penalty after you’ve filed your tax return, you should reply to this notice with an explanation of your situation. The IRS will then review your case to see if there’s a reasonable cause for the issue.
If your business were to collect taxes on communication services, air transportation, and indoor tanning services but failed to do so willingly, or if these taxes were collected from customers but not handed over to the U.S. Treasury then the business responsible might face the trust fund recovery penalty. This penalty equals the total amount of the taxes that weren’t paid.
Key components of the Form 720
We’ve covered some important aspects of Form 720 and excise taxes in general. Now we will look closer at different parts of Form 720. Here is its general structure:
- Parts I, II, and III for reporting taxes: Form 720 is divided into three main sections: Part I, Part II, and Part III. Businesses use the first 2 sections to report various types of excise taxes they are responsible for, like those on environmental services, telecommunications, air travel, various fuels, and many more. Part III is used as a summary.
- Schedule A for tax liability: This schedule is for the calculation and reporting of the tax they owe for each semi-monthly period. It helps in tracking the tax due at different times within the quarter.
- Schedule T for reporting two-party exchange information: Schedule T applies to taxable fuel transactions. It details the gallons of fuel received or delivered under such exchanges, ensuring the correct party is held responsible for the associated excise taxes.
- Schedule C for claims: If a business has overpaid taxes or is eligible for a tax credit or refund, they use this section to claim these amounts. This could include taxes paid on fuels used for specific non-taxable purposes or overpaid excise taxes on other items.
What type of taxes can you find in Part I and II of Form 720?
Parts I and II are used for reporting specific excise taxes. While the form covers over 50 types of those taxes, many of them are assorted in some broader categories. Below, we will cover most of the federal excise taxes included in Form 720 by the IRS.
Fuel taxes are special federal taxes added to the cost of various types of fuel. When you buy diesel or gasoline, there’s a tax per gallon (this tax is higher for diesel compared to gasoline).
Businesses dealing with fuel, like gas stations, are responsible for collecting this tax from customers and paying it to the government.
But there are also other types of fuel taxes, one of them being alternative fuels tax. This includes taxes on fuels like liquefied petroleum gas (LPG), compressed natural gas (CNG), and liquefied natural gas (LNG). Each type of alternative fuel has a specific tax rate.
These taxes help fund various government projects, like road maintenance and transportation infrastructure. Businesses that sell or use these fuels need to collect and pay these taxes to the government.
Air transportation taxes
These taxes are collected by the airlines or charter services and then paid to the government. They are used to fund various aviation-related expenses like airport maintenance and air travel security.
For example, when you buy a ticket for a flight, there’s a 7.5% tax on the price of the ticket. Additionally, for flights within the U.S., there’s an extra charge, called the domestic segment tax, which in 2023 was $4.80 for each part of your journey (like each takeoff and landing).
These taxes are levied on activities or products that have an environmental impact. They can include taxes on certain chemicals, ozone-depleting substances, and oil. The aim is often to fund environmental conservation efforts or to incentivize more environmentally friendly practices.
The retail excise tax mainly applies to certain heavy vehicles and parts. It’s a 12% tax on the first sale of truck chassis and bodies, trailers, semitrailers, and tractors, but only if they’re above specific weight limits. So, if you sell heavy-duty vehicles or specific parts in this category, this tax is likely relevant to your business.
Communication taxes are additional charges on certain telecommunication services, collected by service providers and passed on to the government. The current federal telephone excise tax is set at 3%.
Manufacturers excise taxes are special taxes applied to certain products made or sold by manufacturers. These taxes include coal taxes, tire taxes, gas guzzler tax, and vaccine tax.
These taxes are added to the cost of producing certain types of goods like coal, tires, fuel-inefficient vehicles, and vaccines. Manufacturers need to account for these taxes in their pricing and business operations.
Ship passenger tax
Ship passenger tax is a tax that commercial ship operators need to pay. It’s $3 for every passenger on trips that last more than a day (over 24 hours) on ships with sleeping accommodations for at least 17 people. This tax also applies to passengers on gambling cruises that go outside U.S. territorial waters.
Foreign insurance taxes
Foreign insurance taxes on IRS Form 720 apply to premiums paid for insurance policies issued by non-U.S. insurers. The tax must be reported and paid by the person who pays the premiums, issues the policy, or is insured under the policy.
Indoor tanning services tax
This excise tax involves a 10% tax on the fees paid for indoor tanning services. This tax is generally paid by customers using these services and must be collected and submitted to the IRS by the business providing the tanning services. The business responsible for offering the tanning services is liable to file the tax return and pay the tax, even if it wasn’t collected from the customer.
Other payments and taxes
The Patient-Centered Outcomes Research (PCOR) fee, reported on IRS Form 720, is a charge for issuers of certain health insurance policies and sponsors of self-insured health plans. The fee, based on the average number of lives covered, is $3.00 per life for policy years ending between October 1, 2022, and October 1, 2023.
Another type of excise tax applies to specific sport fishing and archery equipment. Manufacturers, producers, or importers of these items, like fishing tackle, electric outboard motors, bows, and arrow shafts, must pay a tax ranging from 3% to 11% of the sales price.
There is a wide range of different excise taxes that businesses might be liable to pay. For a full list and more information, please visit the IRS website.
How to fill out Form 720
In this final section, we will give you a short overview of what filling out each part of Form 720 entails, so you can know what to expect when you want to file it.
In Part I of this form, you need to list all the applicable excise taxes your business has incurred for specific goods and services like fuel, airline tickets, or environmental services and then calculate the tax amount based on the government’s set rates for each item.
Here, you report any other types of excise taxes your business is subject to, which may include taxes on things like coal, tires, and certain types of vehicles. Just like in Part I, calculate and enter the tax amounts according to the prescribed rates for each category.
Remember to carefully read the form’s instructions for each tax category to ensure accuracy and compliance with tax laws.
Part III of IRS Form 720 is the section where businesses report and calculate their excise tax liability for the quarter. This part is crucial for businesses to reconcile the taxes they owe based on their activities during the reporting period. Here’s a simple breakdown:
In Part III, you’ll summarize the taxes you’re liable for, based on the data you’ve already entered in Parts I and II of the form. This is where you consolidate all your tax information for the quarter including Schedule C if you filled that one too.
Part III also allows you to compare the total tax due with the deposits you’ve already made during the quarter. This helps ensure that you’ve paid the correct amount of tax and aids in identifying if you owe additional taxes or are eligible for a refund.
Firstly, determine the amount of excise tax you owe for each semi-monthly period within the quarter. A semi-monthly period is either the first 15 days of the month or from the 16th to the end of the month.
On Schedule A, enter your calculated tax liability for each of these semi-monthly periods. There are separate boxes for each period where you’ll enter the corresponding amounts.
Remember, this schedule is crucial for keeping track of your tax obligations at different times in the quarter and ensuring that you’re paying the right amount at the right time.
If Schedule T applies to your business, you need to identify the two-party exchange and note the gallons of taxable fuel received or delivered under a trade or exchange agreement between two registered entities.
When filling out Form 720, you only need to complete Schedule C if you are claiming credits or refunds for certain taxes that you’ve already paid. Schedule C is used when a business is eligible for a refund or credit on specific excise taxes, such as for nontaxable uses of fuels or for taxes paid in error.
So, if your business has overpaid excise taxes or is entitled to a tax credit (for instance, for fuel used for non-taxable purposes), then you would use Schedule C to report these amounts and claim your refund or credit. If you don’t have any credits or refunds to claim, you can skip Schedule C when filing Form 720.
FAQ: Federal excise tax and Form 720
1. What is IRS Form 720?
IRS Form 720, known as the Quarterly Federal Excise Tax Return, is used by businesses to report and pay federal excise taxes on specific goods, services, and activities.
2. Who needs to file Form 720?
Businesses that manufacture, import, or sell goods subject to excise taxes, such as fuel, airline services, tobacco, and alcohol, must file Form 720. Providers of certain services like indoor tanning and companies responsible for environmental taxes also need to file.
3. How often is Form 720 filed?
Form 720 is filed quarterly. The due dates are April 30, July 31, October 31, and January 31 for the respective quarters.
4. What are the different parts of Form 720?
Form 720 consists of Parts I and II for reporting various excise taxes, Part II for tax summary, Schedule A for detailing tax liability, Schedule C for claiming refunds or credits, and additional Schedule T for reporting two-party exchanges of taxable fuel.
5. Do you use Form 720 for tobacco and alcohol excise tax?
No, IRS Form 720 is not used for reporting federal excise taxes on alcohol and tobacco products. These specific excise taxes are reported in different forms. Alcohol and tobacco excise taxes are reported on forms provided by the Alcohol and Tobacco Tax and Trade Bureau (TTB), not the IRS.
The IRS Form 720 covers a wide range of other federal excise taxes, such as those on fuels, certain types of trucks, air transportation, indoor tanning services, and policies issued by foreign insurers, but not for alcohol and tobacco.
6. Are there exemptions to excise taxes reported on Form 720?
Yes, certain goods and services may be exempt from excise taxes depending on various factors. Check the specific instructions for each tax type on Form 720 for exemption details.
7. What is Schedule T in Form 720?
Schedule T is used to report two-party exchange information, specifically for transactions involving the exchange of taxable fuel between registered entities.
8. How do I calculate the taxes due on Form 720?
The tax rates and calculations depend on the specific type of excise tax. Refer to the IRS instructions for Form 720 and the applicable sections for each tax category.
9. Can I claim a refund for overpaid taxes on Form 720?
Yes, if you overpay excise taxes, you can claim a refund using Schedule C of Form 720.
10. How does the Electronic Federal Tax Payment System (EFTPS) work for excise taxes?
The Electronic Federal Tax Payment System (EFTPS) is a free service provided by the U.S. Department of the Treasury to facilitate the electronic payment of taxes, including excise taxes. Once you enroll in EFTPS, you can schedule payments online or by phone. Payments for excise taxes must be scheduled at least one business day before the tax is due to ensure timely payment. EFTPS allows you to keep a record of all payments, which is helpful for record-keeping and compliance purposes.
IRS Form 720 is an essential component of tax compliance for many businesses. By providing a detailed look at how to file this form and understanding the various types of excise taxes, we hope this article has demystified some of the complexities associated with tax filing.
Remember, staying informed and up-to-date with your tax obligations not only helps in avoiding penalties but also ensures the smooth running of your business.
If you find yourself overwhelmed or uncertain about any aspect of Form 720, don’t hesitate to seek professional help. Keeping accurate records, filing your taxes on time, and understanding your responsibilities are key steps toward successful business management and fiscal responsibility.
This article has been prepared for informational purposes only and gives a general overview of the IRS Form 720. It’s not intended to provide any tax advice. It’s highly recommended to consult with a tax professional to ensure that taxes are properly calculated and reported.