Are business card flier miles taxable?
By Cathleen McCarthy
Dear Cashing In,
I frequently use airline miles acquired through the use of my business credit card for personal travel. I have one credit card in particular that I can either purchase the tickets using miles, or I can pay for the tickets using the card, then I am reimbursed for them after the fact (tickets to be used for personal travel). My question is: Are there any tax implications for which way I choose to purchase the tickets? -- Brian
You shouldn't have to worry about tax implications on rewards tickets. You earned those miles as a bonus for charges made (even though you didn't have to cover the charges).
Standing precedent on this issue is a statement made by the IRS in 2002, regarding "the taxability of frequent flier miles or other promotional items that are received as the result of business travel and used for personal purposes." Based on the difficulty of trying to decipher business use from personal, and the timing and valuation of rewards, the IRS said it would not pursue tax enforcement with respect to promotional benefits such as frequent flier miles.
"Consistent with prior practice, the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flier miles or other in-kind promotional benefits attributable to the taxpayer's business or official travel," the announcement read. "Any future guidance on the taxability of these benefits will be applied prospectively."
Of course, when that statement was issued, banks weren't giving out 40,000-mile sign-up bonuses. Credit card rewards have become more complicated and bonuses more generous since then. Yet, the actual value of those miles has fluctuated drastically and generic miles such as those offered by the Venture card are quite different from airline miles. Generic miles are redeemed according to the price of airfare -- cost times 100 miles -- which is very different from the way airline miles are redeemed. The value of generic miles drops sharply with more expensive flights. Airline miles, on the other hand, devalue when seats become unavailable. How do you put a standard valuation then on miles rewards?
If recent events are any indication, we're more likely to run into tax issues with sign-up bonuses, although that's not an issue yet, and certainly not for a company card. (You didn't get the sign-up bonuses, your company did.) An incident early this year left frequent fliers a bit anxious about this. In January, Citi sent IRS 1099 forms (for reporting miscellaneous income)to customers who received bonus miles with American Airlines as an incentive for opening a savings or checking account. These 1099s valued the miles at 2.5 cents each. Citi did not send 1099s for miles earned as credit card bonuses, however.
As I mentioned earlier, part of the reason miles have been left alone so far has to do with the fact that it's practically impossible to accurately valuate them. Most estimates put the current value of an airline frequent flier mile at about 1.2 cents, 1.5 at most, given the average cost of airfare today. Thus, the 2.5 cents Citi came up with for American AAdvantage miles shook some people up. Will banks not only flag you to be taxed on something they offered as an incentive, and then unilaterally set a taxable value on them at twice their actual worth?
So far, there have been no reports of taxing miles rewards connected to credit cards, but if any are vulnerable, given this precedent, it would be sign-up bonuses, not miles earned for charges made. In that case, your miles would be safe, because you didn't earn sign-up bonuses for your company card. Whatever bonuses were negotiated, they went to your employer.
It's possible that taxation rules on credit card rewards and frequent flier miles will change, of course, but the Feds are not likely to go after miles for charges made, or the travel they bought, any time soon.
See related: Determining value of rewards redemption
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Published: May 1, 2012
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