Private Air Travel Options and Tax Considerations

July 18, 2022

Private Banking

Travel by private aircraft offers a multitude of benefits; however, these advantages come at a price. Stacia Kroetz and Lindsay Hodgkins evaluate ownership options and related financial, legal, tax and regulatory matters for those considering private air travel.

Hopping on a commercial flight used to be a relatively simple, occasionally even pleasant, endeavor. In recent years, however, increased security measures, COVID-19 safety measures, labor shortages and flight delays have made the experience unpredictable and at times unpleasant. As a result, many people who have the means are now taking a serious look at their options for private travel.

In addition to mitigating COVID-19 risks, travel by private aircraft offers a multitude of benefits, including comfort, efficiency and flexibility. However, these advantages come at a price, and it’s important to carefully evaluate your ownership options and related financial, legal, tax and regulatory matters before making any decisions. Private air travel comes in many forms across varying price points, ranging from complete ownership to chartered flights, with partial ownership and prepaid jet cards falling somewhere in between.

Ownership Options

In determining what type of ownership is right for you, first consider your flight time during the year prior to COVID-19. Did you fly a typical amount? Would you have traveled more if you had access to a private aircraft? Was your travel mostly for business or for pleasure? Does your current role require you to be in the same city most days, or are you able to work remotely much more than you were able to pre-COVID-19? The idea is to take stock of how often, to where and with whom you travel most.

Full Ownership

Full ownership usually makes sense for those who fly more than 300 hours a year or for those who simply want the guarantee of flexibility with a specific aircraft and crew. There are also some tax benefits associated with purchasing a plane under current law, discussed later in this article.

Although you will have maximum control as an owner, you will also have more responsibility, including liability for the aircraft, hiring and managing the crew, maintaining the aircraft and covering all costs associated with operating the plane and moving it to its next destination.

Fractional Ownership

Fractional ownership, an arrangement similar to a timeshare in a house or condo, may be appropriate for those who fly approximately 150 to 300 hours a year, but is commonly owned in 50-hour increments. Here, you own a share or a portion of a private jet, rather than the whole aircraft. Fractional ownership allows you to be in control of your trip and the things that matter to you, like the itinerary and type of aircraft, without having to handle any operational details.

Your fractional ownership interest correlates to the number of hours you are permitted to fly in an aircraft. For example, a one-sixteenth ownership interest typically works out to about 50 hours of annual flight time, and a one-eighth ownership interest equates to about 100 hours.

Fractional ownership comes with professional management, maintenance and guaranteed availability of a plane when you need it, but it can also mean hefty per-hour charges on more heavily used planes, unanticipated changes to your scheduled departure time and restrictions on selling your share of the plane.

There is also significant liability risk if you, as the owner or operator, are in “operational control” of the aircraft. Operational control is defined by the Federal Aviation Regulations to mean “the exercise of authority over initiating, conducting or terminating a flight.” Many of the companies selling fractional ownership interests in private airplanes offer liability insurance coverage as part of the package or act as the operator under Part 135 (discussed in more detail later in this article) so that the fractional owner is not treated as having “operational control” and thus has less liability exposure.

Seven companies currently offer fractional ownership programs, namely NetJets, Flight Options (currently transitioning to a charter company), Flexjet, Nicholas Air, Airshare, PlaneSense and Northern Jet Management (also known as The Company Jet).¹The purchase price of a fractional ownership interest varies significantly, as it is dependent upon the type of aircraft selected. While this article does not provide a full in-depth analysis of each company, some relevant highlights are as follows.

NetJets, a Berkshire Hathaway-owned company, is the dominant player in the fractional ownership market. This program features a global fleet, minimum investment of upfront capital, guarantee of selected aircraft or better, no repositioning fees, a prearranged crew, a dedicated maintenance staff and hangar, as well as prearranged fuel costs.²

Flexjet offers benefits like the ability to upgrade or downgrade your aircraft based on your needs, “short-leg waivers” that enable flyers to waive the minimum charge for flights under one hour and enrollment in the Flexjet Versatility Plus program, which allows flyers to buy and sell up to 25% of their purchased flight hours to other owners within the program, thereby helping align estimated costs with actual flight time.³

PlaneSense, a U.S.-based company, has a fleet designed for shorter trips. While NetJets and Flexjet fleets contain many large jets, PlaneSense focuses on smaller planes that cost less to operate and can use shorter runways, providing customers with additional options for their travel needs.⁴

Alternatives to Ownership

Private ownership, a luxurious yet expensive way to travel, is not the only way to fly private. A charter arrangement or a jet card may be a better alternative for those who fly less than 150 hours a year or prefer a pay-as-you-go approach.

Through a charter arrangement, you contract for services on a trip-by-trip basis or use the services of a charter broker, a specialist who acts as a representative for the leasing of an aircraft. While this arrangement enables you to enjoy the flexibility of private travel in a cost-effective manner, it may also lead to inconsistency in service, competition for peak usage periods and top aircraft and strict refund policies for traveler cancellations. Wheels Up, the second-largest private aircraft operator in the United States, is a private jet charter company that allows members to book flights at all-inclusive hourly rates. Wheels Up currently offers three membership types (Connect, Core and Business), each intended for a different type of traveler. Connect memberships are designed with the occasional flyer in mind, one who does not require guaranteed aircraft availability. Core members are those who fly more frequently and want guaranteed availability on short notice. Business memberships are suitable for companies that are looking for private travel options without the responsibility of owning a plane.⁵

Members of all types can request and book private flights from a real-time inventory list, join shared flights with other Wheels Up members, book empty-leg flights at marked-down rates, enjoy discounts at partner-linked vacation properties and gain access to other exclusive lifestyle experiences. Both Core and Business members also have access to a 24/7 member services team and dedicated account managers. Costs include a one-time initiation fee ranging from about $3,000 for a Connect membership to about $30,000 for a Business membership, as well as annual dues ranging from $2,495 to $14,500.

In December 2019, Wheels Up partnered with Delta Private Jets to offer customers access to a fleet of more than 190 private aircraft and other exclusive benefits, including the opportunity to earn Delta Medallion Status through Wheels Up flights and the option to earn and use Wheels Up “flexible funds” to pay for both private flights and Delta commercial flights.⁶

An even simpler form of access to private travel is through a jet card, which is a prepaid card that enables travelers to use planes at rates that are often cheaper than charter arrangements. Jet cards are usually structured in one of two ways: plane-specific or deposit-based. A plane-specific card allows you to buy a fixed number of hours on a certain aircraft, whereas a deposit-based card allows you to purchase a specific dollar amount of travel, which is then debited each time you book a flight. Both plane-specific and deposit-based jet cards allow you to arrange travel without negotiating a contract or exchanging payment for every trip, and family members can share the membership and travel to different destinations simultaneously. However, jet cards typically impose expiration dates for prepaid flight hours, so if you do not use them, you may lose them.

To date, there are over 50 different jet card providers offering more than 250 programs. Some of these programs offer set prices, while others search the market for the best daily rates. Programs can vary in their designation of peak days, and some require daily minimums for shorter travel.

NetJets offers a jet card option, the Marquis program, targeted at individuals who fly less than 50 hours a year and prefer a shorter-term commitment. Clients have access to a variety of aircraft and can arrange travel within as little as 10 hours’ notice for domestic flights on off-peak days. Marquis jet cards begin at approximately $165,000 for 25 hours and must be used within 24 months of purchase. This upfront fee covers the total cost associated with the flight hours purchased. Additional fees may include charges for ancillary service requests (e.g., transfer services), international fees or handling charges.⁷

Flexjet also offers a jet card option called the Flexjet 25, which begins at $160,000 and allows flyers to choose between multiple aircraft with inclusive pricing and a 25-hour minimum purchase increment. This program has been paused due to increased demand and is set to return in mid-2022.

Sentient Jet offers all-inclusive fixed rates, guaranteed availability and jet card hours that never expire. The company currently offers two programs: The SJ25+ designed for access to light aircraft (starting at $187,450 for 25 hours) and the SJ25 designed for access to mid, super-mid and large cabin jets (starting at $241,475 for 25 hours).⁸

Regulatory Requirements

If you have decided that you prefer an ownership interest, either in full or a fractional share, it is important to familiarize yourself with the relevant Federal Aviation Administration (FAA) requirements and tax considerations.

FAA Regulations

The FAA, the executive agency responsible for aviation oversight in the United States, has prescribed a multitude of rules relating to aircraft ownership, ranging from registration guidelines to insurance requirements to safety regulations. As might be expected, larger ownership shares generally require more burdensome regulatory compliance and maintenance.

Title 14 of the Code of Federal Regulations (14 CFR) details these rules, known as the Federal Aviation Regulations (FARs), which are designed to promote safe flying by protecting pilots, passengers and the general public from unnecessary risk. The FARs are organized into sections, or “parts,” that govern specific types of activity.

Part 91 or Part 135?

One of the most common sources of confusion among aircraft owners is whether their aircraft is regulated by Part 91 or Part 135 of 14 CFR. The main distinction is whether you are using your plane strictly for private use or for some commercial or charter-type use as well. Like many consumer protection laws, the FAA created a set of stricter rules (under Part 135) where the public is involved in an effort to protect against the possibility that safety will be sacrificed for profits.

Part 91 provides general operating and flight rules for aircraft operating within the United States and applies to anyone who owns at least a one-sixteenth interest in a private aircraft. Owners under Part 91 cannot accept compensation or reimbursement for transportation services and must abide by a set of defined conditions under which the aircraft may operate, covering things like pilot training, landing distance requirements and weather limitations.

The general rules of Part 91 control the aircraft and its operation unless a more restrictive Part 135 rule applies. Part 135 governs the operation of aircraft for compensation or for hire, including charter arrangements. Owner-operators under Part 135 are required to hold a Part 135 certificate, which is a time-consuming, expensive certification. The purpose of Part 135 is to hold those owners, operators and pilots who are operating in a commercial capacity to a higher standard than someone operating solely for his or her own personal transportation. In addition to setting forth more burdensome maintenance and compliance obligations, Part 135 requires pilots to undergo more intense initial and recurrent training and imposes much stricter rules relating to crew rest time. As a result, the regulatory and liability risk is lower with a Part 135 certification.

Tax Considerations

There are other costs associated with aircraft ownership, including sales taxes, use taxes and personal property taxes. And while the tax landscape can get complicated, the variation in state laws and mobility of airplanes make for planning opportunities to minimize the amount of tax owed. In addition, there are some tax benefits available if the plane is used in connection with a business.

Sales Tax

Sales tax is a transaction-based tax and will only apply once when the transaction occurs if you purchase an aircraft in a state that has a sales tax and you don’t qualify for an exemption.

One commonly used exemption, the “fly away” exemption, is available in some states and allows owners to avoid the sales tax in the state where they purchase an aircraft if they take delivery of it out of state or intend to ship it out of the state within a timeframe prescribed by state law. For example, if you buy an airplane in California and take it out of California (and base it in another state) within the prescribed period, the fly away exemption will apply, and you will avoid California sales tax. This exemption, however, will not be entirely effective if the aircraft is moved to a state that has a use tax.

Use Tax

States generally assess either a sales tax or a use tax, but not both. A use tax is a tax on the use, storage or consumption in the taxing state of property acquired outside the state and subsequently brought into the state. State law generally requires that you have a significant connection to the state before any use taxes are imposed, but applicability of the tax differs by state. Some states impose a use tax on the first use of property in the state, some impose it only on property used in the state within a certain time period after it was purchased, and others impose the use tax on the presence of the property in the state for a specified number of days.

Personal Property Tax

In addition to the sales and use taxes, you may owe an annual state or local personal property tax based on the fair market value of your aircraft. Personal property tax applies to the property of both residents and nonresidents whose property is held within the taxing state or locality.

The actual site of your aircraft, rather than the state in which you reside, determines the place of taxation. Therefore, if you live in a jurisdiction that does not have a personal property tax, you may still owe the tax if you base the aircraft within a taxing jurisdiction. If your aircraft has a somewhat permanent location within a taxing jurisdiction and you are not merely passing through, you can be subject to personal property tax.

Excise Taxes

Air transportation of persons or property for compensation or for hire is considered commercial transportation for tax purposes. This transportation is subject to a federal excise tax (FET) of 7.5%, which is triggered any time an aircraft is operated for compensation with a crew and passengers within the continental United States or for flights starting or ending within 200 nautical miles of the northern and southern borders.

Tax Deductions

If an aircraft is owned and operated by a business and the operating costs associated with the aircraft are incidental to that business, those expenses will be deductible under section 162 of the Internal Revenue Code (IRC) as “ordinary and necessary expenses paid or incurred in … carrying on a trade or business.” In other words, if a flight is ordinary and necessary to conduct business, the related costs are typically deductible.

Additionally, the 2017 Tax Cuts and Jobs Act (TCJA) revised section 168 of the IRC to allow business owners to write off the full cost of a new or preowned aircraft purchased and placed into service after September 27, 2017, and before January 1, 2023. The bonus depreciation can be taken in the year of acquisition provided that the aircraft is placed in service for business use during that year.

On the other side of the coin, the TCJA eliminated the ability of employers to deduct costs associated with flights for business entertainment and significantly reduced the deductibility of certain personal nonentertainment flights. Personal entertainment flights, like flying to vacation destinations or to visit friends or relatives, were not deductible before the TCJA and are still not deductible under the new law.

Personal nonentertainment flights include things like commuting, traveling for a funeral, traveling to receive medical treatment or traveling to see an advisor. Under the TCJA, expenses attributable to commuting are now nondeductible, except in limited circumstances to ensure the safety of an employee, but other nonentertainment expenses remain deductible.

As discussed throughout this article, access to a private aircraft can offer first-class convenience, flexibility and comfort. However, purchasing, owning and operating a private aircraft should only be undertaken with a team of sophisticated advisors who can assist you in sorting out the myriad economic, tax and legal issues. If you are interested in discussing aircraft ownership or one of the alternatives, please reach out to a BBH relationship manager or wealth planner.

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¹ Source: SherpaReport.
² Source: NetJets.
³ Source: Flexjet.
⁴ Source: PlaneSense.
⁵ Source: Wheels Up.
⁶ Source: Wheels Up and The Points Guy.
⁷ Source: NetJets.
⁸ Source: Sentient Jet.

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Private Air Travel Options and Tax Considerations

InvestorView Q1 2022

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