Making Travel Less Taxing: Airfare and Transportation

Another great post Scott. Thanks!

Thanks, Winston!

@Scott, Thanks for the info especially around the international travel part. If I am reading it correctly, it appears that any trip internationally can be considered a business trip if it is up to 1 week in duration.

So if I leave the US on Sat, March 2nd, travel internationally and have just 1 business lunch, then land back in the US on the following Saturday, March 9th, this would be considered up to one week and thus this airfare would be eligible to be considered a business trip. Is this correct?

The 1 week rule seems too lax to be accurate.

@RestlessLocationSyndrome - yes, that's my reading of the law. The opportunity here is that if you are planning to go somewhere anyway for less than a week, then if you can include some business meetings, the cost of the airfare portion of the trip becomes deductible, which counterintuitively, is more generous than the domestic travel policy. But, note that lodging and other expenses will only be deductible for the days you're doing business, and your travel companion would be subject to the tests discussed.

I suppose the thinking here is that most business owners would not spend airfare for one business lunch since even if the expense is deductible, that only reduces your cash outlay by your tax rate. For example, assume you spent $1,500 for a ticket to fly to Paris for a business lunch and that you're in the 28% tax bracket. You only *save* for tax purposes 28% of the $1,500 cost.

@Matt -

I agree it does seem too generous; I don't make the rules...just try to interpet them. I refer you to IRS Publication 463, page 7.
http://www.irs.gov/pub/irs-pdf/p463.pdf

Perhaps the further thinking is "who has time and cash to undertake such outings?" A business must make a profit 2 out of 5 years to avoid hobby loss rules. So, perhaps the tax policy is that if the business owner is willing to spend business funds on international airfare, then owner presumably knows how to best manage the business.

Thanks Scott!

So a couple of things I got from this are
- Those who sell their "gift-able" status certificates not only raise the ire of the airline, but may also be committing tax fraud if they don't declare the sale on their taxes 😛
- wanted to look up "bona fide" again, since it is a widely used word but wanted to be sure of the definition when related to law.

A question in regards to miles: why are miles earned through debit cards taxable (people receive 1099s from the bank), while those on credit cards are not taxable? If taxes are paid, can the ticket mileage expense be deducted?

Third to clarify, if I want to do volunteer work and fly to an organization to conduct the work, can I deduct the airline fee from my personal taxes?

@Chris B -

Yes, on audit, cash inflows into a bank account would have to be explained to the IRS as to why they aren't taxable.

That's an excellent question on debit card miles earned. I was not aware that those generated a 1099. I know BofA (Alaska) and Suntrust (Delta) are popular mileage earning debit cards. Did either of those issue a 1099 for the miles from everyday spend? I wonder how many cents per mile they valued the miles?

I know that initial account bonuses may be taxable (as Citibank did) for bank accounts, because the bank considers them a prize for opening the account. I believe that miles issued for opening a credit card are different because they are considered a rebate for the spending you do on the card (even if there's no minimum spend other than $1).

Officially, no mileage redemptions are deductible. However, if taxes were paid, and you redeemed those miles for a business trip, you may be able to deduct the miles redemption equal to the income you previously realized, but you'd have to explain to the IRS in a way they'd accept how you determined which "set" of miles were redeemed.

Yes, you may be able to deduct expenses incurred in traveling to a volunteer site, but only if there is "no significant element of personal pleasure, recreation or vacation in the travel." Deducting travel costs related to charitable service is quite strict since there's obvious room for some abuse, and of course, you have to itemize deductions to take advantage of charitable contributions. If you want to discuss more, send me a tweet about your specific situation.

Scott, what about the cash cost of redemption taxes and fees? Let's say my "friend" had a lot of Virgin Atlantic miles and redeemed them for business purposes, but had to pay $500 in taxes and fees. Would this be deductible?

@ThatJohn -

Yes, expenses for taxes, baggage fees, ticketing changes, fuel surcharges and other fees related to frequent flyer redemption for business travel would be deductible. If for personal travel, then none of the expenses are deductible just like when you pay cash for a personal ticket.

I hope your "friend" is going somewhere nice on business.

@Scott:
Interesting reasoning regarding business loss issues, but that gets more into whether a business can afford to pay for the ticket in the first place. The situation I see is more along the lines of an employee, contractor, or business-owner taking a moment during personal travel to meet with a client or business associate, and suddenly being able to deduct the flight cost from taxes, with nothing out of pocket from the business. It seems ridiculously loosely written.

I'm not so much thinking of a business spending wildly on inefficient trips, but rather on the seemingly absent protections to prevent various parties from tacking on a business meeting in order to meet the vanishingly low standard to make a trip a "business trip", and then deducting the ticket price from their taxes.

Matt -

Yes, I understand your point; quite a bit of abuse could be possible for the right situation, which I would see as a wholly-owned business where the owner has discretion over his schedule and finances. If the IRS or Congress saw this as a regularly exploited loophole, then I suppose we'd see this regulation tightened.

In any business that is owned by disinterested parties, the other owners would likely scoff at corporate funds being used to the benefit of one person's vacation disguised as a business trip.

I guess I'm looking at this more from the position of the business not reimbursing for the trip and deducting from business taxes, but an employee or contractor (or business owner, but that's slightly different) just buying the ticket ad deducting it as an unreimbursed business expense. No corporate funds involved.

Matt, yes, I see your point. If you're a contractor, then you'd be able to deduct the cost of the travel directly against your income, but if you're an employee, you'd be subject to the unreimbursed employee business expenses limitation. That limitation requires that expenses exceed 2% of your adjusted gross income before they become deductible and that you itemize deductions.

So, for a taxpayer with an income of $100,000, the first $2,000 in unreimbursed expenses would not be deductible. Also, a savvy IRS agent may ask this question: what employer requires an employee to go on a trip for business purposes but doesn't reimburse them? For a contractor who gets their own clients, that's an easier answer than for an employee who receives all his work from one employer.

The idea that miles would be taxable income seems strange. Couldn't the industry simply side-step that issue by claiming that when you purchase a ticket you are actually purchasing the ticket + miles - converting one cash asset into two new equal-value assets in a ticket and points.

When you sell a personal vehicle the sale of the car isn't taxable income, it's just converting the asset you already have (car) into a different asset (cash). So long as you don't sell it for a profit of course.

So by the same logic it would seem so long as you aren't "making money" on miles they aren't income.

@Shawn -

I'm a little confused by your question. If you sold a car for a gain (which only happens for vintage cars or for cars where bonus depreciation is taken in the first few years of ownership), you would report a gain on the sale. The reason there is no gain on the personal vehicle sale is not because you converted the car to cash; it's because you sold it for less than you had purchased it.

I don't think the form of the income makes a difference. A lot of taxpayers "barter" with others thinking that if you exchange something other than cash, it's not taxable. Although it would be quite difficult for the IRS to catch bartering transactions, technically, any income or accession to wealth is taxable and it need not be received in cash. If an employer gives an employee a house in exchange for services rendered, such a transfer is not in the form of cash but is still taxable income.

In the same way, the airline separating out the miles would not change the taxation of the benefit received...if miles were taxed (which thankfully they are not).