If you drive, I will 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 take a walk I will put weight on your feet
The Fab Four freed flying from their 1966 song about taxes. Thanks to the bipartisan hit of 2020 widely known as the CARES law, 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, there is an asterisk in this promotion.
To date, only a handful of the more than 60 companies selling Jet Cards are promoting the “Buy Now, Fly” tax-free element, although that number is increasing.
By my count, Airstream Jets, Alliance Aviation, Jet Linx Aviation, Jets.com, Flexjet, FlyExclusive, Magellan Jets, Nicholas Air, and Sentient Jet came to NetJets that came out of the shaft right at the start.
That’s because there has been confusion about how vacation would work for flights in 2021 and beyond. In fact, they still exist, which is why the offer is not kept general.
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% pre-pandemic levels, you can argue that the savings were helpful in attracting newcomers.
If the vacation is not extended, the FET, as it is commonly known, will be withdrawn from midnight on New Year’s Eve for flights within the continental US and limited destinations in Canada and Mexico.
In the case of plane tickets and one-off charter flights, the taxable event is when buying, not when flying. If you book and pay for a flight now, for example in 2025, you will save 7.5% even for the future date.
Since airlines do not sell seats more than a year in advance, there is a limited time window. However, when you charter a private jet there is no such limitation.
Of course, there are several reasons why it doesn’t make sense to book dozens of individual charters so far in advance, although there will likely be plenty of people booking their flights for January and February in December.
Jet cards are a different story.
Although there are different versions, the most common one involves prepayment. While you are flying, the amounts corresponding to the travel expenses will be debited from your account. Some jet cards expire within a certain period of time, usually 24 months, or once 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.
So far there has been no reason to buy more than you need for the next year or so. The popularity of jet cards is largely based on the fact that they offer benefits similar to owning a jet or sharing ownership with no long-term commitment.
Most people buy 10, 25, or 50 hours straight. If they are happy with their provider and still have to travel, they are likely to extend.
While private aviation outperforms airlines and as one of the few bright spots in the travel, tourism and hospitality industries challenges RV rentals and western ranches, it is still under a lot of pressure with many business flyers on the ground.
In that case, you might be wondering why not everyone offers the “buy now, fly later” tax-free element?
That’s because while death and taxes are two of the only safe things in life, the IRS doesn’t interpret tax laws.
When I spoke to the IRS (yes, they are actually calling back), a spokesman pointed out 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 purchased a card during the FET Holidays this year, the taxable event would be when you used the balance 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 presented includes a jet card for a specific type of aircraft. 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 occurs for you after the FET vacation is up when you book your flight, it would appear that if they couldn’t pick up at the broker they would go to the operator.
A spokesman for the tax office referred me to section 4263 (c). In the payment of taxes, it states: “If any tax collected under Section 4261 is not paid at the time of payment for carriage, then according to regulations prescribed by the Secretary, unless that tax is collected under any other provision” of this sub-chapter is that Tax payable by the carrier providing the first leg of such carriage starting or ending in the United States. “
Of course, this has caused consternation among brokers and operators. When private jet charter brokers book a trip for their clients with an operator, they can literally tick a box to indicate that they are transferring the FET directly to the IRS. When an auditor is audited, the auditor simply provides the records and the auditor then ensures that the broker has actually paid the tax.
For the CARES Act scenario, several people said it would be a long road if the IRS were to ever collect the tax, including potentially years of negotiation and litigation.
“There is no indication that the IRS has an agenda (regarding FET),” said Scott O’Brien, who is with the National Business Aviation Association. He reiterated that the CARES Act and the excise tax exemption are intended 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 the 7.5%, chances are 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 banking fees associated with them. Others allow your provider to use your funds for operations. The bankruptcy of JetSuite earlier this year left its 900 Jet Card customers with the bag $ 50 million in unused credits.
Also read your contract. If at some point your broker or operator is prosecuted by the IRS, do they have the right to collect the unpaid taxes from you?
John Hoover, an aviation attorney at Holland & Knight, LLP who has been researching the issue for its clients, brokers and operators, says he advises them to write their contracts so they can get back to you. After all, that’s why you hire a lawyer to draft the contract.
Most importantly, before signing, make sure that 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 discounts on long-haul flights that can save you more on a single flight than you would save 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. That can cost you a lot of money if you keep your legs short. If you qualify for round-trip discounts, programs exist that save up to 40% off the price of a one-way ticket.
Then consider, are you 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 manager 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 of the reasons you are unlikely to see these offers. On the tax implications, he adds, “If Apple paid 1% more tax, that’s more than the entire Jetcard industry (in terms of revenue).” Last year, the tech giant had revenue of over $ 260 billion U.S. dollar.