If you drive a car, I’ll tax the road
If you try to sit, I will tax your seat
If you get too cold, I’ll tax the heat
If you go for a walk, I’ll tax your feet
The Fab Four exempted flying from their 1966 song about taxes. Thanks to the bipartisan 2020 hit commonly referred to as the CARES bill, it may be a while before you have to pay the 7.5% federal excise tax on your private jet flights.
At least, that’s the thought of a growing number of companies selling prepaid jet cards. However, this promotion contains an asterisk.
The CARES Act now ensures a lot of payment and offers tax-free jet card offers.
SOPA Images / LightRocket via Getty Images
To date, only a handful of the more than 60 companies that sell Jet Cards are now promoting tax-free purchases, although that number is rising.
By my count, Airstream Jets, Alliance Aviation, Jet Linx Aviation, Jets.com, Flexjet, FlyExclusive, Magellan Jets, Nicholas Air and Sentient Jet joined NetJets right from the start, which was the first to come off the slide.
That’s because there was confusion about how vacation would work for flights in 2021 and beyond. In fact, there is still why the offering is not made universal.
The goal of suspending the tariff by the end of the year is to stimulate the aviation industry decimated by COVID-19. With private aviation back to 85% prepandemic, you can argue that the savings were helpful in attracting newcomers.
If the vacation is not extended, starting at midnight on New Years Eve, the FET, as it is commonly known, will be picked up again for flights within the continental US and limited destinations in Canada and Mexico.
For plane tickets and one-time charter flights, the chargeable event is on purchase, not on flight. If you book and pay for a flight now, for example in 2025, you will save 7.5% for the future date as well.
Since airlines don’t sell seats more than a year in advance, there is a limited window. However, when you charter a private jet there is no such limitation.
Of course, there are several reasons why it wouldn’t make sense to pre-book dozens of individual charters so far, although it will likely be in December that many people will book their flights in January and February.
Jet cards are a different story.
While there are different versions, the most common one involves prepayment. During the flight, the money corresponding to the travel expenses will be debited from your account. Some jet cards expire within a set period of time, usually 24 months, or after all of your money has been flown away. In other cases, the funds never expire.
A typical deposit is between $ 100,000 and $ 250,000. However, with some programs there is no limit to how much you can donate.
Until now, there has been no reason to buy more than you needed for the next year or so. The popularity of jet cards is largely due to similar benefits as owning a jet or sharing property with no long term commitment.
Most people buy 10, 25, or 50 hours at a time. If they’re happy with their provider and still need to travel, they’re likely to extend.
While private aviation outperforms airlines, challenging RV rentals and western ranches as one of the few bright spots in the travel, tourism, and hospitality industries, it is still under a lot of pressure as many flyers for the bread and butter business are are grounded.
In that case, you might be wondering why not everyone is buying now and flying tax-free later.
That’s because while death and taxes are two of the only safe things in life, the IRS’s interpretation of the tax code is not.
Speaking to the IRS (yes, they actually do return calls), a spokesperson referred me to a non-binding internal memo from 2015 that contained two scenarios.
The memo was entitled “Prepaid Air Travel Cards”. You can read the full memo here.
The first example describes the purchase as a “prepaid gift card”. In this case, the IRS says that the chargeable event is not when the card is purchased, but when the actual ticket is purchased.
In other words, even if you bought a card during the FET vacation this year, the taxable event is when you used money on your card to purchase your ticket.
The second scenario is that the chargeable event is the purchase of the jet card. In this case, the scenario shown contains a jet map for a specific aircraft type. Payment is non-refundable. Deposit funds can only be used on flights with this type of jet and several other attributes.
In the future, should the IRS decide that the taxable event occurred for you after the FET vacation expired and when you book your flight it would appear that they are going to the operator if they cannot pick up from the broker.
A spokesman for the tax office referred me to Section 4263 (c). Under Payment of Taxes it says: “If a tax levied under Section 4261 is not paid at the time of payment for the transportation, this shall apply according to the regulations prescribed by the Secretary, unless this tax is levied under another provision.” In this subsection, this tax is paid by the carrier providing the first portion of the shipment that begins or ends in the United States. “
This has of course led to consternation between brokers and operators. When private jet brokers book a trip for their clients with an operator, they can literally tick a box to say they will transfer the FET directly to the IRS. When an operator is audited, the operator simply provides the documentation and the auditor then ensures that the broker has actually paid the tax.
For the CARES Act scenario, if the IRS ever wanted to collect the tax, several people said that it would be a long road, including potentially years of negotiation and litigation.
“There is no indication that the IRS has an agenda (regarding FET),” said Scott O’Brien, a member of the National Business Aviation Association. He reiterated that the CARES law and excise leave are designed to boost business. In other words, the goal is to encourage you to buy as much air travel as possible, and that is exactly what these deals do.
For those of you looking to save 7.5%, chances are that you will be tempted to deposit larger amounts of money than you normally would.
While the tax officer might not be one of them, this rose has a few thorns that you should be aware of.
The first is, will your money be protected if the operator or broker goes out of business?
Some offer escrow accounts, though you will usually have to pay the associated bank fees. Others allow your provider to use your funds for operations. After JetSuite went bankrupt earlier this year, 900 Jet Card customers had over $ 50 million in unused loans.
Also read your contract. If at any time your broker or operator is prosecuted by the IRS, does they have the right to collect the unpaid tax from you?
John Hoover, an aviation attorney at Holland & Knight, LLP who has been researching the problem for its clients, brokers and operators, advises them to write their contracts so they can come back to you. After all, that’s why you hire a lawyer to write your contracts.
Most importantly, before signing, make sure the policies of the card you are purchasing meet your needs. Some programs include de-icing fees; others don’t. Suppose you fly a lot in winter, it can be expensive. Some programs offer long-term discounts that can save you more on a single flight than you would with FET over the course of a year. Other programs have a minimum charge of two hours, regardless of how long your flight is. In other words, your 30 minute flight will be billed at 120 minutes. This can cost a lot of money if you have short legs. If you qualify for round-trip flight discounts, there are programs available that can save you up to 40% on one-way fares.
Then think about buying too much Jet Card?
If your deposit is non-refundable, what if your travel needs change in a year or two? What if the management changes and you no longer like the service?
A jet card executive told me he didn’t think the IRS would be the problem. His concern is that the media is taking up these offers as “another way rich people avoid taxes” rather than “helping an industry in dire need of help”.
This is one reason you are unlikely to see these offers advertised. Regarding the tax implications, he adds, “If Apple paid an additional 1% in taxes, that’s more than the entire jet card industry (in terms of revenue).” Last year, the tech giant had sales of over $ 260 billion.