Credit Cards > Credit Card News > Using frequent flier miles for tax-deductible business trip? Figure fair market value
Using frequent flier miles on a tax-deductible trip
There are two ways to deduct expenses for your miles
By Randy Petersen
Cashing In
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
Dear 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. Plus, I'll give you some history and perspective on why it is a great question. I'm also going to include the larger picture of "equivalent cash value" if you were substituting miles for a regular business-related trip and the implications of reimbursement.
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.
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.
Now, using that same logic -- and it is logic at this point -- if the IRS considers this redemption as a reduction in the purchase price, then it does not logically stand that you could claim a deduction for the use of the miles without first establishing an income basis. In your situation, it really matters not that you are using them for a tax-deductible purpose. 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 tax deductible."
Now, let's move on to an even larger issue of miles and their value with respect to the 2-cents-per-mile cost you reference. These types of valuations can come into play if you have a situation whereby a traveler uses frequent flier miles in place of a revenue ticket for legitimate business purposes. (The reason I am including this segment in relation to your question is that it actually does have some spillover.)
In your case, let's say that your use of the miles was not related to a tax-deductible trip. In this scenario, you actually could make use of what is considered "fair market value" of the miles as it relates to the actual ticket price. But, it comes with strings. For general purposes, most travelers can choose from one of two different strategies for choosing "fair market value" of the use of frequent flier miles. One is a general rule of 2 cents per mile. While this method is not steeped in actual fact and research, given that general airfares do rise and fall with market and economic conditions, it does seem to be a good estimation for balancing the ticket prices that can come from both low-cost carriers and from your standard legacy carriers. To get more exact, one would typically use the American Express or Travel Industry of America indicators of what average ticket prices are annually.
Most travelers can choose from one of two different strategies for choosing "fair market value" of the use of frequent flier miles
Now, having said that, it is also true there is another method of value determination and that is "replacement value." In this situation, one would use a nationally recognized airfare reservation tool, such as those provided by Expedia or Travelocity. Once the exact routing of the trip you are proposing to use your miles for and the "lowest" price is determined, you would use that as the exact reimbursement for the use of your miles. This can often be the preferred method of "fair market value" when using miles for an international trip in which business or other premium class tickets are allowable since the value here is often from 4 cents to 12 cents per mile, thus being more of a benefit for the person substituting their miles for travel.
This all sounds good so far, right? Let me interrupt your daydreaming for a minute as there is actually case law relating to the IRS treating frequent flier miles as income.
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.
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.
Hope this helps. For reference, if you ever want to read just how the IRS and the tax court came to this conclusion, here's the case law on it.
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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