If your small business deals in goods and services that are subject to excise tax — like air transportation, fishing equipment or gasoline — then you’ll have to complete IRS Form 720, which must be filed with the IRS on a quarterly basis in order for your business to report and pay your federal excise tax liability. Learn all you need to know about Form 720 in this comprehensive, step-by-step guide.
What is Form 720?
IRS Form 720, or the Quarterly Federal Excise Tax Return, is an IRS tax form that businesses must complete on a quarterly basis in order to report and pay federal excise taxes. An excise tax is a tax that the federal government imposes on specific goods or services that are manufactured in or imported into the U.S. Excise taxes are often included in the price of the product, like gasoline or alcohol, so you might not even realize you’re paying them. However, if your business sells a good or service that is subject to excise tax, then you are responsible for reporting and paying those taxes; IRS Form 720 allows you to do so.
IRS Form 720 consists of three parts, as well as Schedule A, Schedule T and Schedule C sections and a payment voucher (called Form 720-V). If your business is responsible for completing Form 720, you must do so quarterly and can file electronically or by mail. Payments for excise taxes, however, are required on a semimonthly basis and should be made by electronic funds transfer.
Who needs to fill out Form 720?
Your business needs to fill out IRS Form 720 if you deal in the goods or services for which excise taxes are due. These products and services can include, but are not limited to:
Passenger ship transportation.
Indoor tanning services.
Bows and arrows.
Form 720 lists all of the products and services that qualify a business to pay excise taxes. Additionally, in the official Form 720 instructions document, the IRS lists two conditions for you to determine whether you need to complete this form:
If you were liable for, or responsible for, collecting any of the federal excise taxes listed on Parts I and II of Form 720 for a prior quarter and haven’t filed a final return.
If you were liable for, or responsible for, collecting any of the federal excise taxes listed on Parts I and II Form 720 for the current quarter.
If your business does not deal with any of the products or services listed on Form 720, you are not responsible for excise taxes and do not have to fill out this tax form. It’s also important to note that although alcohol, tobacco and firearms require excise taxes, they are not covered under IRS Form 720. These products are regulated by the Alcohol and Tobacco Tax and Trade Bureau and taxes must be filed using the return form on their website.
When do businesses need to fill out Form 720?
IRS Form 720 needs to be completed on a quarterly basis. The IRS Form 720 instructions break the deadlines into a helpful chart that we’ve re-created here:
First quarter: January, February, March
Second quarter: April, May, June
Third quarter: July, August, September
Fourth quarter: October, November, December
Essentially, Form 720 needs to be completed by the last day of the first month that follows the end of the prior quarter (e.g., the first quarter ends on March 31, so the form is due by April 30). If the due date for filing Form 720 falls on a Saturday, Sunday or legal holiday, you can file the return by the next business day.
However, although IRS Form 720 only needs to be filed quarterly, payments for excise taxes must be made semimonthly. The IRS considers a semimonthly period as the first 15 days of the month (first semimonthly period) or the 16th through the last day of the month (second semi-monthly period). If your business is paying excise taxes for communications or air transportation, you have the option to pay according to an alternative schedule, again, as dictated by the Form 720 instructions.
Excise tax deposits must be made to the IRS by electronic transfer (aka an ACH deposit) and submitted at least one day before the date the deposit is due; so if the due date is January 15, the payment must be submitted by January 14. Just like with filing Form 720, if a due date falls on a weekend or legal holiday, the next business day becomes the de facto deadline.
Where to find Form 720
You can find IRS Form 720 along with the official instructions on the IRS website. From there, you can print the form, fill it out and mail it to the IRS, or alternatively, you can fill it out on your computer, print it and mail it to the IRS. You also have the option to file the entire form electronically by working through any electronic return originator, transmitter or intermediate service provider participating in the IRS e-file program for excise taxes. You can search the IRS database of authorized providers to locate a provider in your area.
Form 720 instructions: A step-by-step guide
Now that you've got the basics, let’s dive deeper into the specific parts of the form and how to fill them out.
1. Gather accounting documents and fill out your business information
If you’ll be filling out Form 720 for your business, it will be useful to gather a few accounting documents before beginning. These reports, which can be generated from your accounting software platform, like total sales and units sold, will be instrumental in helping you calculate the excise taxes for Form 720. Depending on your specific business, you’ll need to calculate your excise taxes as a percentage of total sales or a percentage of units sold; these documents will allow you to do so.
Once you’ve gathered the appropriate reports, you can begin filling out the first part of IRS Form 720, which asks for your basic business information. As you can see in the photo below, you’ll be asked to provide your name, address, end date of the respective quarter and your employer identification number, or EIN.
2. Calculate the appropriate excise taxes and fill out Form 720 Part I
You will complete Part I of Form 720 if your business needs to pay the following taxes:
Environmental taxes: petroleum oil spills, imported petroleum products, ozone-depleting chemicals (if you must pay these environmental taxes, you’ll also have to complete IRS Form 6627).
Communication and air transportation taxes: phone service or air transportation.
Fuel taxes: diesel, kerosene, gasoline, natural gas.
Retail tax: trucks, trailers, tractors.
Ship passenger tax.
Foreign insurance taxes: health insurance policies issued by foreign insurers.
Manufacturers taxes: coal, tires, “gas guzzler,” vaccines.
As you can see below, Part I of the form (as well as the IRS Form 720 instructions document) details specifically what products qualify for the completion of this section. If your business qualifies, you will use the respective rate in the “Rate” column to calculate the taxes your business is responsible for.
Based on the calculation of your total sales/units sold and the respective rate, you will fill in your business’s tax responsibility in the “Tax” column. At the bottom of Part I, you will add up all of the taxes and fill in your total amount.
If none of the excise taxes in Part I apply to your business, you can bypass Part I and head directly to Part II. However, if your business has any tax liability in Part I, you’ll also have to complete the Schedule A section of IRS Form 720.
2a. Calculate the net tax liabilities and fill out Form 720 Schedule A
The Schedule A section of IRS Form 720 is to be filled out only by businesses that have a tax liability from any tax in Part I of the form. If, on the other hand, you don’t have liability from Part I, but do have liability for Part II, you do not need to fill out Schedule A. Schedule A reports your business’s net tax liability. In Schedule A, you will add the net tax liability for each tax for each semimonthly period and enter the total in the applicable box.
You will complete number 1 of Schedule A, unless you are liable for any of the alternative methods taxes, as indicated by the appropriate IRS numbers (22, 26, 28 or 27 — which correspond to Part I). If your business is responsible for any of those taxes, you will complete number 2 of Schedule A.
3. Calculate the appropriate excise taxes and fill out Form 720 Part II
You will complete Part II of Form 720 if your business provides any of the following products or services:
Specified health insurance policies.
Sport fishing equipment.
Electric outboard motors.
Bows and arrows.
Indoor tanning services.
Essentially, Part II will be completed the same way as Part I. If your business qualifies for any of the goods or services in Part II, you will calculate your tax using your appropriate sales documents and the rate specified in the “Rate” column. You’ll fill in the calculated tax in the “Tax” column and add up your total at the bottom of Part II. It’s worth noting that the tax for health insurance is calculated differently than the other categories, using the average number of lives covered, as opposed to units sold or total sales.
4. Determine if you need to fill out Schedule T or Schedule C and complete these sections of Form 720
Before moving on to Part III, you’ll want to determine if you need to fill out Schedule T or Schedule C of the IRS Form 720. Both Schedule T and Schedule C are related to businesses that deal with fuel.
You only need to complete the Schedule T section of Form 720 if your business produces or sells diesel fuel, kerosene, gasoline or aviation gasoline. Schedule T is used to report the total amount of taxable fuel gallons received or delivered in a two-party exchange within a terminal.
In a two-party exchange, the person receiving the fuel, not the person delivering it, is liable for the tax imposed on the removal of taxable fuel from the terminal. If your business deals with any of these fuel types according to the IRS definition of a two-party exchange, you will need to complete Schedule T as you see below.
Like Schedule T, Schedule C is only applicable to businesses that deal with one of the fuel types (and a few tire types) as indicated in Parts I and II of IRS Form 720. If you're liable for taxes on Part I or Part II, you may be able to reduce the amount you owe by filing a claim on Schedule C. However, only certain types of fuel and use-cases qualify for a Schedule C claim. The IRS indicates the use types that can qualify for a Schedule C claim in the chart below:
If your fuel business falls under one of the use-cases in this chart, you can fill in Schedule C by indicating the use-case number, the tax rate, gallons amount and finally, the total dollar amount of your claim.
Once you’ve completed any appropriate columns in Schedule C, you’ll add up your final total on the last Schedule C page and enter it on “line 15.” You will use this total to complete Part III of IRS Form 720.
5. Fill out Part III of Form 720
On Part III of IRS Form 720, you’ll calculate your total taxes by adding both totals from Part I and Part II and filling that amount in box number 3. If you completed Schedule C, you’ll add your total claims amount in box number 4. In box 5, you’ll write your excise tax deposits made for the quarter. If you overpaid in previous quarters, you’ll write this amount in box 6 and box 7. Box 8 will be a total of boxes 5 and 6 and box 9 will be a total of boxes 4 and 8. If your total tax in box 3 is greater than box 9, you’ll enter the difference, your “balance due” in box 10. You will have to pay this amount with your return filing of Form 720. On the other hand, if box 9 is greater than box 3, you'll be able to indicate what you wish to do with the overpayment difference. You can either apply the amount to your next return or have it refunded to you.
Finally, you’ll sign and date IRS Form 720 to complete it. If you're going to designate a third party, like your certified public accountant, or CPA, to discuss your return with the IRS, you'll indicate this information in the “third party designee” section. Additionally, if your accountant or other tax professional prepared Form 720 for your business, they’ll fill in their information in the “paid preparer use only” section.
6. File Form 720 and pay your balance due, if necessary
Once you’ve completed and reviewed your Form 720, you’ll need to file it with the IRS before the specified due date — and there are two ways to file. You can mail your Form 720 directly to the IRS or, if you’re completing the form through the IRS e-file program, you can file electronically. When you file Form 720, you must also pay your balance due (from box 10 of Part III). You can pay your balance with a direct debit, check or money order. If you’re filing electronically, you must pay with a direct debit. If you’re filing physically, however, you have the option to complete Form 720-V; this payment voucher form will accompany your check or money order to pay your balance due. You will then send Form 720-V in with your completed Form 720 when you file to the IRS. It’s important to remember that before you file Form 720 with the IRS, you’ll want to make copies of your completed form for your business’s records.
IRS Form 720: Tips for completing the form
As you can see, there are many involved steps required to complete IRS Form 720. To help streamline this tax process, here are some tips to keep in mind:
Prepare ahead of time. One of the best ways to avoid errors and stress when completing tax forms like Form 720 is to stay organized. Keep track of your inventory, sales and other important financial metrics using your accounting platform and the services of your bookkeeper or accountant, if you work with either. This way, when it’s time to fill out Form 720, all of your information will be up to date, organized and complete. Additionally, you’ll want to make sure to keep up with the semimonthly excise tax payments and quarterly filing deadlines for Form 720. If you realize a few days before the deadline that you’re unprepared, you’re more likely to commit errors when completing the form, or even file late. By preparing ahead of time and paying close attention to your deadlines, you’ll be able to avoid errors and any late fees.
File electronically. Although many business owners still prefer to work on paper, you may be able to save yourself both time and hassle by utilizing the IRS’ e-file program. Completing the form electronically will save you money on paper and stamps; plus, you won’t be relying on your mailing system to make sure you meet your deadline. In addition, filling out Form 720 electronically can make it easier for you to consult information housed in your accounting software, refer to the IRS filing instructions, as well as check for any recent IRS updates to the form.
Utilize the service of a tax professional. This is perhaps one of the most significant ways you can save yourself the time and stress involved with tax forms like IRS Form 720. If you hire a tax advisor to complete, or help you complete, Form 720, you’ll have access to someone with years of experience with these procedures. A tax professional will be familiar with Form 720, the different sections and how your business may or may not be responsible for particular excise taxes. More than likely, your tax professional will be able to complete the form more quickly and accurately than if you were to do it alone. Furthermore, if any issues arise after you’ve filed Form 720, your tax advisor will be able to more effectively address them — and, if they’re an enrolled agent — can represent you before the IRS.
A version of this article was first published on Fundera, a subsidiary of NerdWallet.