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 tax deductible.”
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.
See related:Tips to keep frequent flier miles from expiring, Tracking reward program changes before they happen, How to find the best airline rewards bonus miles deal, Debunking myths about frequent flier programs
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