What is Form 720

Form 720 is a quarterly federal excise tax return used by businesses and individuals in the United States to report and pay various types of federal excise taxes.

These taxes apply to specific goods and services, including fuel, air transportation, and certain health services. Such taxes are usually included in the cost of sales, so the end customer does not see it on their receipt. Federal excise tax may be charged at various times in a transaction including import, sale (manufacturer or retailer) or use.

Understanding and accurately completing Form 720 is essential to comply with IRS regulations and avoiding penalties.

The purpose of Form 720

Form 720 serves as a consolidated document for reporting multiple federal excise taxes. Its primary purpose is to streamline the process for businesses to report and pay these taxes. 

Excise taxes are imposed on activities such as the sale of gasoline, indoor tanning services, and the manufacture of tires. Your accountants will know whether any product or service is subject to these taxes.

By using Form 720, taxpayers can handle their excise tax obligations efficiently.

Who needs to file Form 720?

Businesses and individuals responsible for collecting and paying federal excise taxes must file Form 720. This includes manufacturers, producers, and importers of taxable goods, as well as service providers subject to excise taxes. For example:

• Airlines report excise taxes on air transportation.
• Medical device manufacturers report taxes on their products.
• Tanning salons report excise taxes on their services.

If in doubt, consult with a tax expert to find out if your product or service is subject to these takes. Forms can be completed on paper or (the IRS preferred method) online via any IRS-approved Modernized e-File provider (MeF).

When is Form 720 due?

Form 720 is filed quarterly, with specific due dates throughout the year:

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

Timely filing is crucial to avoid penalties and interest on unpaid taxes.

How to complete Form 720

Completing Form 720 involves several steps:

• Gather information: Collect all necessary sales data and excise tax rates
• Fill out parts I and II: Enter the relevant tax categories and amounts
• Schedule A: Calculate any adjustments to the reported taxes
• Schedule C: Claim any eligible tax credits
• Sign and date: Ensure the form is signed and dated before submission

Using tax software can significantly simplify this process and reduce the risk of errors.

Types of taxes reported on Form 720

Form 720 covers a wide range of federal excise taxes, including:

• Environmental Taxes: Taxes on ozone-depleting chemicals
• Communication Taxes: Local telephone service taxes
• Air Transportation Taxes: Applicable to passenger and cargo flights
• Fuel Taxes: For gasoline, diesel, and aviation fuel
• Health-Related Taxes: Taxes on indoor tanning services

The 10% tax on indoor tanning services was imposed in 2010 as part of the Patient Protection and Affordable Care Act, to dissuade use of such services, which were discovered to increase the risk of malignant melanoma. The rationale for taxing these services is comparable to the reasons taxes are imposed on alcohol and tobacco.

Understanding which taxes apply to your business is crucial for accurate reporting.

Ensuring compliance with Form 720

Filing Form 720 is essential for compliance with federal tax laws. Non-compliance can result in significant penalties and interest charges. To ensure compliance, businesses should:

• Maintain detailed records of taxable activities and transactions
• Regularly review tax rates and regulations
• Use tax preparation software for accuracy
• Consult with a tax professional for complex situations

Filing Form 720 electronically

The IRS allows Form 720 to be filed electronically through their e-file system. Electronic filing is faster, more convenient, and reduces the likelihood of errors. 

Additionally, businesses can use the IRS's Electronic Federal Tax Payment System (EFTPS) to make their tax payments online.

Consequences of late filing

Failing to file Form 720 on time can result in penalties. The IRS generally imposes a penalty of 5% of the unpaid tax for each month the return is late, up to a maximum of 25%. 

Interest will also accrue on any unpaid taxes from the due date until the tax is paid in full.

Available exemptions and credits

Certain exemptions and credits can reduce the amount of excise tax owed. 

For example, businesses exporting taxable goods outside the US may qualify for a credit. Schedule C of Form 720 allows taxpayers to claim credits for overpayments or taxes paid on certain nontaxable uses of fuel.

The role of Form 720 in business operations

While Form 720 does not directly impact payroll and HR functions, it is part of the broader compliance framework that businesses must navigate. 

HR and payroll departments should collaborate with finance or tax departments to ensure all excise taxes are correctly reported and paid.

Form 720 is one of many IRS forms used to report various taxes. It specifically deals with excise taxes, while other forms, such as Form 941, handle payroll taxes, and Form 1120 is for corporate income taxes. Comprehensive tax compliance requires understanding how these forms, and their related taxes, interrelate.

For businesses that deal in goods and services subject to excise tax, understanding and properly filing Form 720 is crucial for maintaining compliance and avoiding unnecessary penalties. 

Regularly reviewing tax obligations and seeking professional advice when needed can help ensure accurate and timely filing. Using Deel PEO or Deel US Payroll can help you comply with federal excise tax and payroll tax filing requirements. Schedule a demo with an expert to learn more.