A Bizav Tax Break—and a Caveat

During the early months of 2020, private aviation, like the broader economy, virtually ground to a halt because of COVID-19. Operators faced leasing and other ongoing financial obligations without much if any income. On lockdown, fractional and jet card users essentially were barred from flying while at the same time, many faced ongoing payment obligations under contracts that continued to run toward expiration, leaving accrued flight time unused.

The Coronavirus Aid, Relief, and Economic Security Act (known as the CARES Act), which was signed into law on March 27, included a provision that offered relief to the private aviation industry. It did so by essentially waiving the 7.5 percent Federal Excise Tax (FET) applicable to air transportation through the end of 2020.

The FET holiday provided a strong incentive to undertake new private aviation investments. At the same time, private flyers, concerned that operators under enormous financial stress might not survive, grew wary of paying large sums in advance for jet cards, charters, and the like. What to do?

One option you may have considered is paying funds into escrow to protect against operators’ business reversals while taking advantage of the FET waiver. In a classic escrow arrangement, you pay into an account held by an independent third party, usually a bank, rather than directly to the operator. Immediately before or shortly after a flight, you direct the escrow agent to release funds to pay for the trip. Thus, you’re better protected if the operator goes under, and the operator is paid promptly for its services. (Some escrow arrangements greatly favor the operator and in the end, are escrows in name only, but that’s a topic for another day.)

This may sound like a perfect way to protect your funds while also avoiding FET. However, the Internal Revenue Service has stated that, for charter flights, it is only when funds are disbursed to the operator that the FET obligation arises.

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Drawing on this reasoning, the private aviation industry generally has taken the position that, regardless of when itineraries are flown, the FET obligation (and therefore its waiver) arises only when payment for a flight is disbursed to the operator.

On the positive side, this interpretation means that, for example, concerning a jet card that’s fully paid for without an escrow before the end of calendar year 2020, flights flown in 2021 and beyond qualify for the FET holiday.

On the other hand, a true escrow arrangement essentially disqualifies you from taking advantage of the FET holiday, excepting only escrows relating to flights flown and paid for by Dec. 31, 2020.

A new stimulus package may include an extension of the FET waiver, but that’s anyone’s guess. In the meantime, private flyers are left facing a Hobson’s choice: protect yourself from operator failures via effective escrow arrangements or take full advantage of the FET break. You likely can’t do both.