Are you paying more than you realize for excise taxes? Many small business owners are unaware that excise taxes contribute to essential programs like highway improvements. Unlike income taxes, IRS reports excise taxes target specific products and services, potentially impacting your bottom line. This guide will unpack everything you need to know about excise taxes in 2024, including who pays them, types, and tax-saving opportunities.
What Is Excise Tax and How Does It Differ from Sales Tax?
How Excise Tax Works
Excise tax is an indirect tax applied to specific goods or services, such as motor fuel, airline tickets, tobacco products, indoor tanning services, and heavy trucks. Unlike a general sales tax, excise tax is typically imposed at the federal or state level and is either included in the retail price or added as a separate line item at the point of sale. This tax targets certain "sin taxes" on products like alcohol and tobacco to discourage use, and funds from these taxes often go toward specific government projects, such as infrastructure improvements.
Excise taxes include both ad valorem taxes (calculated as a percentage of the value of the product or service) and per-unit taxes (fixed fees, such as cents per gallon of gas or per tire). When manufacturers and merchants pay this tax, they often pass the tax on to consumers as part of the retail price, so consumers may not be aware of the excise tax's impact.
Key Differences Between Sales Tax and Excise Tax
While both taxes are consumer-facing, sales tax applies broadly to most goods and services and is charged as a percentage of the cost at the time of sale. Excise tax, however, is imposed on specific goods (such as tobacco, fuel, alcohol, and airline tickets). Unlike sales tax, excise tax can be either a flat rate or percentage-based, depending on the type of product.
For example, federal excise tax on gasoline is collected per gallon, whereas excise on indoor tanning services is a 7.5 % ad valorem tax on the price charged by the tanning salon. Understanding these differences can help you accurately calculate product pricing and meet Internal Revenue Service (IRS) compliance requirements.
Further Reading: Discover how to properly file IRS Form 720 for quarterly federal excise tax returns
What Are the Types of Excise Taxes That Apply to Small Businesses?
Federal Excise Taxes
At the federal level, excise taxes are charged on specific products and services, including gasoline, airline tickets, alcohol, tobacco, and firearms. The federal excise tax on motor fuel helps fund highway and transportation infrastructure, supporting road maintenance and public works. Certain excise taxes, like those on heavy trucks and tires, also contribute to these funds.
If you operate in an industry where you sell or distribute these products, you are required to file Form 720 with the IRS to report federal excise taxes quarterly. Businesses involved in indoor tanning services or selling alcohol and tobacco products must be particularly diligent about compliance, as these industries are heavily regulated and subject to specific reporting and recordkeeping standards.
State Excise Taxes
State governments also impose excise taxes on many of the same products as the federal government, but rates vary widely. For example, excise taxes on cigarettes, beer, gasoline, and property can differ based on state law. State excise taxes are often designed to discourage consumption of specific goods, like tobacco and alcohol, and generate revenue for state and local government programs.
If your business operates across state lines, staying informed about these varying rates is crucial for accurate pricing and planning. State excise taxes on goods like cigarettes and tobacco products may be higher in states that want to reduce consumption, meaning the tax impact can vary for your customers depending on their location.
Further Reading: Learn how to maximize your small business tax benefits
Who Pays Excise Taxes, and How Are They Collected?
Who Is Responsible for Paying Excise Taxes?
Excise taxes are generally paid by manufacturers, importers, or distributors on goods or services, but these businesses often pass the tax on to the consumer as part of the product price. For example, when a business buys gasoline from a distributor, the excise tax is included in the price per gallon, which is ultimately passed on to consumers. If your business sells products like fuel, alcohol, or tobacco, you may be responsible for collecting excise tax and ensuring it’s reported accurately.
Certain small businesses must pay excise taxes directly to the IRS or state tax authorities, depending on the type of excise tax and product involved. Industries like indoor tanning, motor fuel distribution, and tobacco sales are especially prone to federal excise tax requirements.
How Are Excise Taxes Collected and Reported?
Businesses subject to federal excise taxes are required to file Form 720 quarterly, reporting excise taxes on goods and services like alcohol, firearms, fuel, and indoor tanning. Accurate tracking and reporting of these taxes are essential, as missed filings or underreporting can lead to penalties. Each transaction involving excise-taxed goods or services should be carefully documented, including rates, quantities, and any exemptions.
Effective bookkeeping practices are critical for compliance, especially in 2024 when tax regulations may change. By following IRS instructions for Form 720 and consulting tax professionals when needed, your business can stay on top of excise tax obligations and even leverage available fuel tax credits to reduce liability where applicable.
Further Reading: Explore the IRS 2024 federal income tax brackets
How Can You Manage Excise Tax Compliance for Your Business?
Recordkeeping Tips for Excise Tax
Maintaining precise records for each excise-taxed activity is essential. Document details like product sales, taxes paid, any credits claimed, and specific tanning sessions or salon charges for businesses in the indoor tanning industry. Excise tax is commonly imposed on a per-unit basis (like cents per gallon on fuel) or as a percentage of the price (such as the federal 10% on indoor tanning).
By capturing this information accurately, you’ll have clear records to support your quarterly filings on Form 720, required by the IRS for excise tax compliance. These records also protect you in case of audits by clearly showing the excise tax revenue collected and paid.
Staying Updated on Excise Tax Rates
Excise tax is imposed differently across states, and both federal and state governments adjust rates frequently. For example, while federal excise tax is usually fixed for things like fuel, states may adjust rates on specific items such as alcohol or tobacco products.
Staying current on these changes helps avoid underpayment risks. Bookmark the IRS site and your state’s revenue department for updates, as these rates can increase periodically, affecting your overall tax obligation. Tax rate changes on specific goods may impact what taxpayer businesses must collect or remit, so don’t overlook them.
Utilizing Available Tax Credits
Take advantage of tax credits to offset some excise tax obligations. The Fuel Tax Credit, for instance, provides relief for fuel used in non-taxable ways, such as in farming equipment or off-road construction vehicles. These credits are especially useful for businesses involved in high fuel-consumption activities, allowing a small portion of the taxes paid to be reclaimed. Properly documenting these credits not only supports compliance but may improve your business’s tax position as a valuable investment in your financial strategy.
Consulting a Tax Professional for Assistance
Given the complexity of excise taxes on specific goods and the potential for errors, working with a tax professional is often worthwhile. Professionals can clarify differences between federal and state obligations, such as when excise tax is levied versus when it is not, and help ensure that credits are fully utilized. They can also offer guidance tailored to the U.S. market, ensuring that you’re on track with tax obligations for both 2024 and beyond, especially if you handle passenger services or goods like fuel and tobacco.
Key Takeaways
- Excise Tax Defined: An indirect tax on specific goods like fuel and alcohol.
- Tax is Also Industry-Specific: Applies uniquely to certain sectors like transportation and manufacturing.
- Compliance Required: Businesses must track and report excise taxes accurately.
- State Rules Vary: Define excise obligations per state to ensure full compliance.
- File Promptly: Late payments may result in fines, so stay updated on excise tax deadlines.
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