Form 720: Understanding Your Excise Tax Duties

If your business sells certain goods or services, such as airline tickets, tobacco products, or gasoline, it's important to understand your excise tax obligations. Unlike income tax, which is based on your business's earnings, excise tax is based on the consumption of the products you sell and is usually industry-specific. You'll report and pay excise taxes quarterly using IRS Form 720, Quarterly Federal Excise Tax Return. If you expect to owe $1,000 or more in taxes for the year, you would also prepay income tax and self-employment tax to fulfill quarterly estimated tax responsibilities via IRS Form 1040-ES, Estimated Tax for Individuals.

Use this guide to gain a clear understanding of your ongoing excise tax duties and how they relate to IRS Form 720. It touches on who must file, common excise taxes reported on the form, and other considerations to ensure you submit with confidence. When handling your own excise tax responsibilities begins to distract from your business, expert support is available to make sure you're covered and compliant throughout the tax year.

Key Takeaways

• IRS Form 720 is used to report excise taxes.

• Businesses that sell goods or services subject to excise taxes must file IRS Form 720.

• IRS Form 720 is filed on a quarterly basis.

• If you meet the threshold, excise tax deposits are due twice per month.

• Missing IRS Form 720 filing deadlines can result in costly penalties.

• Seek professional tax help when you're unsure about your excise taxes or have difficulty managing complex calculations.

What Is Form 720?

IRS Form 720 is your quarterly federal excise tax return. Use it to report liability by IRS number and to pay the excise tax you list on the form, if applicable. Excise taxes are taxes paid on certain types of goods, services, or activities, and they're often included in the price of the product.

Some excise taxes, depending on the threshold, require semi-monthly deposits. However, no deposit is typically required if your business's net tax liability is $2,500 or less per quarter. In this scenario, you would submit payment with your quarterly federal excise return.

Who Must File Form 720?

Businesses That Typically File

Excise taxes can be industry-specific, applying to businesses including:

• Domestic fuel sellers and importers

• Indoor tanning service providers

• Communications services

• Heavy highway vehicle sales

• Air transportation providers

• Manufacturers of certain goods that are subject to federal excise taxes

It's important to note that not every business selling taxable goods is required to file IRS Form 720. In certain scenarios, this tax is sometimes paid upstream by manufacturers or importers.

Common Excise Taxes Reported on Form 720

Environmental Taxes

Hydrocarbons, certain types of energy, and the process of transporting them can be subject to environmental excise taxes. These are applied because this type of energy and transport is viewed as harmful to the environment. The application of these taxes seeks to mitigate the damage caused while changing consumer behavior. Less demand results in less environmental impact.

Communications and Air Transportation Taxes

Excise taxes also impact air travel and communications.

Commercial airlines pay excise taxes on the tickets they sell and on the use of international air travel facilities, while businesses providing local telephone communication services are also subject to federal excise taxes.

Fuel Taxes

Businesses that sell various types of fuel, such as gasoline and diesel, are usually subject to this tax. However, some fuel types are exempt. Dyed diesel fuel, typically used to power construction, farming, and other off-highway vehicles, is exempt from excise taxes.

Retail and Manufacturer Excise Taxes

Manufacturers and importers of certain medical devices, as well as businesses involved in the manufacturing or importation of firearms and ammunition, may be subject to federal excise tax.

Businesses that manufacture or import tobacco products like cigarettes, cigars, and smokeless tobacco are subject to federal excise taxes. Breweries, wineries, and distilleries pay excise taxes on the beverages they produce. The tax rates vary depending on the type and quantity of the beverage.

Excise taxes are typically built into the prices of cigarettes and alcohol that consumers pay at the point of purchase.

Other Industry-Specific Excise Taxes

An excise tax is applied to heavy trucks (55,000 pounds+), trailers, and tractors if they exceed weight limits. Qualifying truckers and fleet owners submit IRS Form 2290, Heavy Highway Vehicle Use Tax Return, to ensure compliance.

If you're in the healthcare industry, the entity providing health insurance coverage is responsible for paying its share of the excise tax.

When Is Form 720 Due?

IRS Form 720 is due on the last day of the month following the end of each calendar quarter. If the deadline falls on a weekend or federal holiday, it shifts to the next business day.

Submit your completed Form 720 by mail or online through an IRS-approved software provider. Electronic excise tax filing transmissions are preferred.

Track your excise taxes with affordable, full-service bookkeeping from 1-800Accountant.

Do You Need to Make Excise Tax Deposits?

While IRS Form 720 submissions are expected quarterly, the timing of your deposits can vary. Semi-monthly (twice per month) excise tax deposits are expected from most businesses, although there are exceptions. For example, businesses in certain industries with a net tax liability of $2,500 or less per quarter can submit payment with Form 720.

Submit deposits by each deadline electronically via the Electronic Federal Tax Payment System (EFTPS). This regular practice helps avoid failure-to-deposit penalties. It's important to understand that filing IRS Form 720 alone is insufficient if your business is expected to make semi-monthly excise tax deposits.

How to File Form 720

Gather Required Information

Before you start preparing IRS Form 720, it's important to gather all relevant documentation and materials you'll need to complete it. This includes:

• Tax category codes

• Gross sales or taxable units

• Previous deposits you've made

• Employer Identification Number (EIN) and business details

Complete Form 720 Step-by-Step

You'll complete IRS Form 720 via the following steps:

1. Part I. This section is where you report taxes and calculate your total tax liability for the period.

2. Part II. If your business is in the communications or air travel industries, add that tax information here.

3. Schedule A. Use Schedule A for environmental taxes.

4. Schedule T. Use Schedule T for air travel taxes and fuel transfers.

File Electronically or by Mail

You can file IRS Form 720 by mail or electronically. If you're filing by mail, send it to this address:
Department of the Treasury
Internal Revenue Service
Ogden, UT 84201-0009

You can also transmit this form electronically, which is preferred, by using a software provider approved by the IRS.

What If You Need to Correct a Filed Return?

If you realize you've made a mistake on a previous IRS Form 720 submission, make adjustments by submitting IRS Form 720-X, Amended Quarterly Federal Excise Tax Return.

Timing matters. File IRS Form 720-X within three years of the original submission date or within two years of paying the tax.

Penalties for Late Filing or Payment

Similar to other IRS forms and submissions, missing deadlines or failing to pay your excise tax liability can result in penalties.

• Failure-to-file penalties. A 5% penalty is applied for each month or partial month you fail to submit this form, capped at 25%. This percentage may be reduced by 0.5% if you have failed to file and pay.

• Failure-to-pay penalties. A 0.5% penalty is applied each month for failing to pay, capped at 25%.

• Failure-to-deposit penalties. A failure to make semi-monthly deposits can result in a 2% penalty for deposits up to five days late, or a 15% penalty if not paid within 10 days of receiving a delinquency notice.

• Interest accrual. It's in your best interest to address penalties promptly, as interest will accrue until you hit a cap, as demonstrated by the failure-to-file and failure-to-pay penalty structure.

Recordkeeping Requirements for Excise Taxes

Regular recordkeeping activities help to ensure the most efficient excise tax preparation and submission process.

Tracking taxable sales separately from non-taxable sales ensures compliance and the accuracy of your sales tax filings. This allows your business to determine the correct amount of tax and to report it accurately. Documentation retention is also critical in supporting the accuracy of your submissions. Proper retention of invoices and shipping materials helps avoid penalties, substantiates your environmental or fuel tax claims, and ensures compliance.

If you handle your own bookkeeping work, bookkeeping integration is essential. It streamlines ongoing compliance by mapping, calculating, and filing excise taxes directly from your preferred accounting software. This helps promote clean, accurate books that can withstand IRS scrutiny should you receive an audit notice.

Avoid recordkeeping issues going forward by using 1-800Accountant's full-service bookkeeping solution.

Work With Excise Tax Experts

Now that you understand your duties related to IRS Form 720, you can confidently address your excise tax obligations throughout the year. But if you'd prefer affordable, tax-deductible support instead of doing it all yourself, 1-800Accountant, America's leading virtual accounting firm, is ready to help.

When you trust our accounting experts with your sensitive excise tax work, quarterly compliance is managed for you, eliminating stress and freeing up time. Further efficiency is prompted in full-service bookkeeping, payroll, and year-round tax advisory integration, producing the best results for your business.

Schedule a free 30-minute consultation to ensure your excise taxes are filed accurately and on time every time.

FAQs About Form 720

Is Form 720 the same as Form 2290?

No, IRS Form 720 and IRS Form 2290 are not the same. While both are related to excise taxes, they serve different purposes. IRS Form 720 is used to report several goods or services subject to excise tax, while IRS Form 2290 is used to report information related to heavy highway vehicles.

Do sole proprietors need to file Form 720?

Not every sole proprietor is required to file IRS Form 720. However, if the eligibility requirements are met, those sole proprietors will have to file the form quarterly. If they have no excise tax to report for the quarter, they can generally skip that submission.

Can I e-file Form 720?

Yes, you can e-file IRS Form 720. E-filing is generally preferred and speeds up the IRS's receipt of a submission. You can also file IRS Form 720 by mail.

What happens if I overpay excise tax?

Overpaying your tax liability is better than underpaying, as underpayments can subject your business to penalties. If you overpay, you can get a refund or a credit that can be applied to future taxes. Overpayments can impact cash flow, which is why accurate submissions are optimal.

Do I still file if I had zero liability?

While there are exceptions, you should file IRS Form 720 even if you don't have a liability for the period. Enter "None" on line 3, Part III of the form if you have no income to report. This helps you avoid penalties for non-filing, even if you had zero liability.

What is Schedule A used for on Form 720?

Schedule A is used for reporting net excise tax liability for semi-monthly deposits made during the quarter. If you find that you have liabilities on Part I, Schedule A is mandatory. If your business involves air travel taxes or fuel transfers, use Schedule T.

Are excise taxes deductible as business expenses?

Yes, excise taxes are deductible. Because excise taxes are considered to be ordinary and necessary business expenses, they may be deducted on your federal income tax return. Tax deductions reduce your taxable income, lowering your overall tax liability. When you trust 1-800Accountant with your financial work, your designated team will identify every eligible business deduction on your behalf.