IRS Form 720: When Do Businesses Need to File the Excise Tax Return?

If you've recently heard the term excise tax mentioned by your accountant, you might be wondering if this is yet another tax obligation your business needs to worry about. Unlike income taxes that most businesses are familiar with, excise taxes operate differently and apply to specific industries and activities, often catching business owners by surprise.

Many business owners discover their Form 720 filing requirement only after making a transaction that triggers an excise tax, sometimes months after the fact. This delayed realization can lead to penalties and interest that could have been easily avoided. Here’s a comprehensive guide to help you understand whether Form 720 applies to your business and how to handle this specialized tax return correctly.

What Is IRS Form 720 and What Is It Used For?

Form 720, officially known as the Quarterly Federal Excise Tax Return, is the IRS form used to report and pay excise taxes on specific goods, services, and activities. Unlike income taxes that are based on your business profits, excise taxes are imposed on particular transactions regardless of whether your business is profitable.

Think of excise taxes as specialized taxes the government imposes on specific industries and products, often ones that have environmental impacts, affect public health, or use public infrastructure. They work somewhat like sales taxes but are usually collected at the manufacturing or import level rather than at the point of retail sale.

Form 720 is divided into three main parts:

• Part I: Environmental taxes, communications taxes, transportation taxes, fuel taxes, and other specific industry taxes
• Part II: Tax on health insurance providers, pharmaceutical manufacturers, and indoor tanning services
• Part III: Calculations for the total tax, deposits, and amount owed or to be refunded

For example, if you manufacture tires, sell certain types of fuel, operate commercial transportation vehicles, or provide indoor tanning services, you may need to file Form 720 to report and pay the applicable excise taxes.

This form serves as both a reporting mechanism and a payment voucher, making it a critical document for businesses in affected industries.

Which Businesses Are Required to File Form 720?

The range of businesses required to file Form 720 is surprisingly diverse. Here are the major categories of businesses that typically need to file this form:

Environmental Industries:

• Manufacturers of ozone-depleting chemicals
• Importers of products containing ozone-depleting chemicals
• Sellers of certain fuel-inefficient vehicles (gas guzzler tax)

Energy and Fuel Sectors:

• Refiners, producers, and importers of petroleum products
• Alternative fuel manufacturers and retailers
• Coal producers and exporters

Transportation-Related Businesses:

• Airlines (for passenger tickets, frequent flyer miles, and cargo)
• Manufacturers or importers of tires for highway vehicles
• Ship operators using U.S. ports (harbor maintenance fee)

Communications Providers:

• Telephone service providers (local and long distance)
• Telecommunications carriers

Healthcare and Insurance:

• Health insurance providers
• Indoor tanning service providers
• Manufacturers or importers of medical devices

Other Miscellaneous Categories:

• Foreign insurance providers issuing policies to U.S. risks
• Manufacturers of certain vaccines
• Gambling operations (for wagers)

For example, if you operate a small regional airline, you'd need to file Form 720 to report the 7.5% excise tax on passenger tickets and the $4.50 flight segment tax. Similarly, if you own a chain of tanning salons, you'd use Form 720 to report the 10% excise tax on indoor tanning services.

Not sure if your business activities trigger Form 720 filing requirements? The IRS provides detailed tables in the form instructions, or consult with a tax professional familiar with your industry.

How Often Do You File Form 720?

As its full name suggests, Form 720 is typically filed quarterly. The filing schedule follows a standard calendar quarter system:

• First Quarter (January-March): Due by April 30
• Second Quarter (April-June): Due by July 31
• Third Quarter (July-September): Due by October 31
• Fourth Quarter (October-December): Due by January 31 of the following year

However, there's an important exception to this quarterly filing requirement. If your expected excise tax liability is $2,500 or less for the calendar quarter, you can request permission from the IRS to file annually rather than quarterly. This option can significantly reduce your paperwork burden if you have minimal excise tax obligations.

For many businesses, excise tax deposits must be made before the actual Form 720 filing. The deposit schedule depends on the amount of tax liability:

• Regular Deposits: If your tax liability for the quarter is less than $2,500, you can pay with the return
• Monthly Deposits: Required if you reported more than $2,500 in the preceding quarter
• Semi-monthly Deposits: Required for certain taxes regardless of amount

Remember, even if you have no excise tax liability for a particular quarter, you must still file Form 720 if you're registered for excise tax—simply enter zeros on the appropriate lines and submit the form.

Key Sections and Schedules in Form 720

Form 720 might seem intimidating at first glance, but understanding its structure makes it much more manageable. Here's a breakdown of the key sections:

Part I: Excise Tax Liability This section lists specific excise taxes grouped by category:

• Environmental taxes (lines 1-6)
• Communications and air transportation taxes (lines 17-30)
• Fuel taxes (lines 31-80)
• Retail and manufacturer taxes (lines 81-93)
• Foreign insurance taxes (lines 104-113)

Each line corresponds to a specific type of excise tax with its own rate. You only need to complete the lines relevant to your business activities.

Part II: Patient-Centered Outcomes Research Fee and Other Taxes This section covers:

• Health insurance policy fees
• Medical device taxes
• Indoor tanning services tax
• Other miscellaneous taxes

Part III: Tax Calculations Here you'll:

• Total your tax liability
• Enter any adjustments (like claims for refund)
• Calculate the total amount due or refund requested
• Provide information about excise tax deposits already made

Schedule A: Excise Tax Liability This schedule breaks down your tax liability by semi-monthly periods, which is essential if you're required to make deposits more frequently than quarterly.

Schedule C: Claims This schedule is used for claiming certain tax credits, refunds, or adjustments related to fuel taxes.

For example, if you operate a trucking company using alternative fuels, you might use:

• Part I to report highway vehicle use tax
• Schedule C to claim credits for alternative fuel usage
• Schedule A to track your semi-monthly tax liability and deposits

Proper completion of these sections ensures you're reporting and paying the correct amount of excise tax while taking advantage of any available credits or adjustments.

Filing Form 720 Electronically vs. By Mail

When it comes to submitting Form 720, you have two options: electronic filing (e-file) or traditional paper filing. Each method has its pros and cons, though the IRS increasingly encourages electronic filing.

Electronic Filing Benefits:

• Faster processing time
• Built-in math checks that reduce errors
• Immediate confirmation of receipt
• Reduced risk of forms getting lost in transit
• Environmentally friendly

To file electronically, you'll need to use IRS-approved software or work with a tax professional who offers e-file services for excise taxes. While not all tax software includes Form 720 functionality, specialized business tax programs typically do.

Paper Filing Process: If you prefer to file by mail, you'll need to:

1. Complete all required sections of Form 720
2. Sign and date the form
3. Mail it to: Internal Revenue Service Cincinnati, OH 45999-0009

When filing by paper, consider using certified mail with a return receipt to prove timely filing in case questions arise later.

For businesses required to make tax deposits, remember that even if you file Form 720 by paper, you must make electronic deposits through the Electronic Federal Tax Payment System (EFTPS) if your annual excise tax liability exceeds $2,500.

Many businesses find that working with a tax professional experienced in excise taxes simplifies compliance, especially during the first few filing periods when you're still learning the requirements.

Common Mistakes to Avoid When Filing Form 720

Understanding what mistakes to avoid doesn't have to feel like you're taking an advanced accounting exam. Every quarter, these common Form 720 errors cause problems for businesses:

• Filing for the wrong taxes - Only report excise taxes that actually apply to your business activities
• Missing deposit deadlines - Late deposits trigger penalties even if the actual Form 720 is filed on time
• Incorrect calculations - Double-check your math, especially when determining tax on variable quantities or rates
• Failing to file zero returns - If you're registered for excise taxes but had no activity, you still need to file
• Using outdated forms - Tax rates and rules change, so always use the current quarter's form
• Missing signatures - A common oversight that can delay processing
• Inconsistent reporting - Ensure your reported liabilities match your deposits made during the quarter

For example, a fuel distributor might correctly calculate and deposit their fuel excise taxes throughout the quarter but then forget to include Schedule A when filing Form 720. This simple oversight could result in the IRS questioning whether proper deposits were made on time.

Penalties for Late or Incorrect Filing

The IRS takes excise tax compliance seriously, and the penalties for noncompliance can add up quickly. Understanding the potential consequences might just move Form 720 higher on your priority list.

For late filing, the penalty is 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25%. If your return is more than 60 days late, the minimum penalty is the smaller of $450 (adjusted for inflation) or 100% of the tax due.

For late payment, the penalty is 0.5% of the unpaid tax for each month or part of a month the tax remains unpaid, up to a maximum of 25%.

Late deposits carry their own penalty structure:

• 2% if 1-5 days late
• 5% if 6-15 days late
• 10% if more than 15 days late
• 15% if not paid within 10 days of the first IRS notice

Interest also accrues on unpaid taxes and penalties from the due date until the date of payment, at a rate that changes quarterly.

For example, if your business had a $10,000 excise tax liability for the quarter and you filed 30 days late without paying:

• Late filing penalty: $500 (5% × $10,000)
• Late payment penalty: $50 (0.5% × $10,000)
• Plus interest on the unpaid amount

In cases of willful neglect or fraud, the penalties can be even more severe, potentially including criminal prosecution for egregious cases.

Conclusion

Form 720 might not be as well-known as other business tax forms, but for companies in affected industries, proper compliance is essential to avoid costly penalties and interest. By understanding which excise taxes apply to your business activities, keeping track of quarterly deadlines, and maintaining accurate records of taxable transactions, you can navigate this specialized tax requirement with confidence.

Remember that excise taxes are fundamentally different from income taxes—they apply regardless of profitability and often require more frequent deposits than other business taxes. This makes staying on top of your Form 720 obligations a year-round responsibility rather than just a quarterly task.

Need guidance on your specific excise tax situation? NSKT Global specializes in helping businesses navigate complex tax requirements including Form 720 compliance. Our tax professionals understand the nuances of industry-specific excise taxes and can ensure you're meeting all filing and deposit requirements while minimizing your compliance burden.

FAQs About IRS Form 720

What taxes are reported on Form 720?

Form 720 covers numerous federal excise taxes including environmental taxes, fuel taxes, retail taxes, manufacturer taxes, transportation taxes, communications taxes, and health-related taxes. The most common include taxes on gasoline and other fuels, airline tickets, heavy vehicles, medical devices, indoor tanning services, and certain health insurance policies.

Can I file Form 720 online?

Yes! The IRS accepts electronic filing of Form 720 through approved software providers. E-filing offers advantages like faster processing, built-in error checks, and immediate confirmation of receipt. However, not all tax software includes Form 720 functionality, so you may need specialized business tax software or professional assistance.

What is the deadline for filing Form 720?

Form 720 is due quarterly: April 30 for the first quarter, July 31 for the second quarter, October 31 for the third quarter, and January 31 of the following year for the fourth quarter. Remember that excise tax deposits may be due more frequently than the actual form, depending on your tax liability.

Is there a penalty for not filing Form 720?

Absolutely. The penalty for failing to file Form 720 is 5% of the unpaid tax for each month or part of a month the return is late, up to 25%. Additionally, there's a separate penalty for failing to pay the tax on time (0.5% per month), and specific penalties for late deposits. For continued non-compliance, the IRS may pursue more serious enforcement actions.

Do small businesses need to file Form 720?

It depends entirely on your business activities, not your size. Even a very small business must file Form 720 if it engages in activities subject to federal excise tax. For example, a small tanning salon must file to report indoor tanning service taxes, and a small fuel retailer must file to report applicable fuel taxes. There's no "small business exemption" for excise taxes.