A thorough understanding of the Federal Excise Tax is a must for accurate filing of taxes. There are several queries that come to taxpayers minds while gearing up for tax filing. Through this blog we aim to clear some of the Federal Excise Tax FAQs, which would clear common queries that taxpayers may have. The Federal Excise Tax FAQs cover the basic details and information required for easy and simple tax filing.
1. What is Federal Excise Tax?
Excise taxes are taxes imposed by the US Government to the sale of certain products, activities, and services. Airline tickets, gas, tobacco, and cigarettes, tires, alcohol, and gambling are some examples of products and services that are subject to excise tax. Excise taxes vary widely and are subject to frequent changes, they can be levied as a per-unit tax, or as a percentage of the price.
Read our blog on Federal Excise Tax Ultimate Guide to gain detailed knowledge about Federal Excise Tax.
2. What are the examples of Federal tax?
A wide variety of products, services, and activities are subject to excise taxes. Federal excise tax impacts taxpayers across several industries. As outlined by the IRS, examples of Federal tax include:
Environmental Taxes
Communications and Air Transportation Taxes
Fuel Taxes
Retail Tax
Ship Passenger Tax
Foreign Insurance Taxes
Manufacturer’s Taxes
Sport fishing equipment Taxes
Indoor tanning services Taxes
LUST Tax
3. What is the purpose of Excise Tax?
The Government levies Excise tax in order to generate extra revenue, and more importantly, discourage the public from consuming unhealthy products or indulging in activities that are deemed to be harmful to the health and society. Common purposes of excise taxes include sumptuary (or sin) taxes, environmental taxes, benefit-based taxes, and luxury taxes.
For example, by levying tax on tobacco, cigarette smoking is discouraged among the general public. This type of tax is considered as “sin-tax” as they are penalty type consumption charges.
4. Who pays Federal Excise Tax?
Excise taxes are primarily intended for businesses, who are responsible for paying tax to the Government. Businesses usually include this tax in the price of the product/service. Excise Taxes are usually charged to the merchants, or producers, who may then pass the cost of tax to the consumer.
5. What are the types of Excise Tax?
There are mainly 2 types of Excise Taxes - Ad valorem taxes, and specific taxes. Ad valorem taxes are imposed as a percentage of the total purchase price of goods or services or other defined value of products or commodities. This tax is proportional to the value of the product or service. Specific taxes on the other hand are imposed as per quantity. The specific tax is a fixed dollar amount on the amount or size of a product.
Recently, the IRS reinstated the Superfund Chemical Excise Tax levied on the manufacturers, producers, or importers of chemical substances.
6. Does your business pay federal excise taxes? Can you deduct excise tax on federal return?
If you are running a business involving airline tickets, or heavy trucks, or highway tractors, indoor tanning, or tobacco, or other goods, you need to pay Federal Excise Tax. An Excise Tax is not deductible if it is for personal expense. A business expense can be deducted as business expense excise tax for ordinary and necessary expenses of carrying on your trade or business.
7. Are farmers exempt from federal excise tax
As per IRS, Farmers and Fishermen have a special provision in Federal Tax payment. If you are a calendar year taxpayer, and at least ⅔ of your gross income for 2024 or 2025 is from Farming or Fishing, then you have only one payment due date for your 2025 estimated tax. The due dates for the first three payment periods do not apply to Farmers and Fishermen.
8. Are government agencies exempt from federal excise tax?
Historically, state and local Governments and the US Federal Government have reciprocally exempted each other from paying excise taxes.
9. How to pay federal excise tax?
The IRS accepts paper excise tax returns. However, they strongly encourage e-filing of Federal excise taxes via approved e-file transmitters. The list of e-file transmitters is available on the IRS website. Once businesses file excise tax, a confirmation of the same is sent by the IRS.
10. How to Calculate Excise Tax?
The type of excise tax determines the calculation of Federal Excise tax. There are 2 formulas for calculating either one of the types of excise taxes.
Ad valorem tax is calculated as a percentage of the total purchase price of goods or services. For example, a local communications services provider charges $100 per month for the service provided, and the tax is 3%. Then the Ad valorem tax is 100*3%, which is $3. .
Specific taxes are imposed as a fixed dollar amount that applies to the purchase on a per-unit basis. For example, a manufacturing unit produces 10,000 units per day, and the Federal government charges on excise duty worth $5 per unit. Then Specific excise tax would be 10000*5, which equals 50000.
Through these Federal Excise Tax FAQs, we have attempted to clarify the common queries that taxpayers may have. At Simple 720, we are committed to make Federal Excise tax filing accurate and consistent. For smooth and hassle free tax filings, reach out to Simple 720.