Using frequent flier miles on a tax-deductible trip
There are two ways to deduct expenses for your miles
By Randy Petersen
Randy Petersen is editor and publisher of Inside Flyer, which is
considered the leading publication in the world about frequent traveler programs. At CreditCards.com, he writes
Cashing In, a weekly feature in which he answers readers' questions about credit cards rewards programs.
Dear Cashing In,
I took a tax-deductible trip overseas this summer for approved educational purposes related to my job. Rather than purchasing a ticket, I used frequent flier miles for the trip. In deducting the cost of the overall trip on my income taxes (as unreimbursed employee expenses), I wondered how to incorporate the relative cost of the plane ticket. It seems that many websites suggest 2 cents per mile, but I wanted to make sure it was permissible to deduct some equivalent cash value for the frequent flier ticket. Thanks in advance for your advice. -- Fred
This is almost a million-dollar question -- once you factor in the number of lawyers and accountants who may like to weigh in with their advice. In the meantime, I think I can give you some advice that will answer your question.
First, you need to know that the IRS treats frequent flier mileage redemption as a reduction in the ticket purchase price, not as income. This is good news because if it weren't, then we'd all be paying income tax every time we cashed in our miles. Frequent flier miles are not unlike using a coupon collected from the Sunday newspaper for a free carton of orange juice or a box of Bisquick -- that "free" item or discount is not reported as income to the IRS.
In essence, you can't deduct value from an item that does not have
value to begin with, which is why members who donate their frequent
flier miles to various charities (i.e. nonprofit causes) are not allowed
to take a deduction against the donation. For example, this is the
notice for the Make-A-Wish Foundation, which is considered the largest
nonprofit to donate miles to:
"Tax deductibility --The IRS recognizes award points and miles
as a gift or an award from the corporation to the individual. Therefore,
points and frequent flier miles donated to charity are not considered
So you will not be able to deduct your flight if you paid for it using only miles. In fact, there have been cases where employees have actually lost money by using miles for company trips.
In essence, you can't deduct value from an item that does not have value to begin with.
In Charley v. Commission, a taxpayer bought tickets for coach travel but charged his employer for first-class tickets. He used his frequent flier miles to upgrade from coach to first class. His travel agent credited the difference between the prices of the coach and first-class tickets, and the "sale" of his miles earned him about $3,000. His "earnings" (converting his frequent flier miles to cash) were deemed as taxable income. The Tax Court and the Ninth Circuit Court of Appeals agreed that the defendant was wealthier after the transaction, and that is always the determining factor for the IRS.
You may still be able to deduct other expenses from your trip if you
paid for them out of pocket. Business expense deductions are covered under
Internal Revenue Code Section 162, but many of these expenses are held
to an even higher standard of necessity and proof, which is spelled out
in a separate code provision -- Section 274(d). This section
specifically addresses the crux of your situation.
As you are
certainly aware, travel merely for the sake of education is not
deductible. However, if the educational activity enhances your
employment skills, the costs may be deductible. Generally, there must be
evidence of a direct relationship between the educational activity and
the skills required in an individual's employment.
At the end of the day, it certainly is common for members of frequent flier programs to use their miles in a variety of ways toward legitimate business travel expenses and even tax-deductible purposes, but it's not without some sort of accountability on behalf of the traveler. So while we may all discover situations when it seems a good idea to put our frequent flier miles toward business travel use, we must be aware of how the IRS views and treats the reimbursement of such.
The Wall Street Journal refers to Randy as "... the
most influential frequent flyer in America," while The New York Times tagged him "the world's leading expert on
airline frequent flier programs." Randy is editor and publisher of Inside Flyer magazine -- considered the leading publication in the world about frequent traveler programs. He is a regular speaker at
business travel seminars and conferences around the world; and is often called upon by the industry itself for
his comments and suggestions about the future of frequent traveler programs.
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