Do I have to pay tax on that? Get the full scoop in today’s post!
“Expat” taxpayers living abroad are often given certain perks from their employers that would not be provided if the individual remained State-side. For example, provision by the employer for airline tickets home for the taxpayer and his/her family; or payment of tuition directly to the school where the taxpayer’s child studies abroad. In addition to these perks, which are income taxable to the employee-taxpayer, an expat working abroad will often undertake significant business travel for his/her employer. As a result of this business travel, the employee will often earn “frequent flyer miles” or other in-kind promotional benefits.
A number of my clients asked whether the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to business or official travel results in income that is taxable to the individual when he later uses the miles for his own personal travel. Good question. It had been awhile since I examined it. Here’s the scoop –
Frequent Flyer Miles & Taxation
The Internal Revenue Code (IRC Sec. 61) provides that gross income means “all income from whatever source derived”, unless there is a specific exception for the particular item of income. That provision would include in income a taxpayer’s personal use of frequent flyer miles earned from business travel. Digging further, the frequent flyer issue is evidently more complex and requires special attention beyond the general Code provision.
The Internal Revenue Service (IRS) specifically addressed the question in 2002 and to my knowledge, it has not addressed it again. In Announcement 2002-18, the IRS stated it would not assert that a taxpayer’s receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel results in income to the taxpayer. How generous of the IRS!
Generosity notwithstanding, numerous unresolved issues surround the topic of taxing frequent flyer miles. Due to the complexity of these issues, IRS stated it “has not pursued a tax enforcement program with respect to promotional benefits such as frequent flyer miles.” Most likely, lack of enforceability is a major underlying reason for such IRS “generosity”, but let’s not look a gift horse in the mouth!
Can Taxpayer’s Rely on the Announcement?
My readers are probably well aware that talk is cheap, even when the speaker is the IRS. Only certain types of IRS guidance may be relied upon by taxpayers. My blog post here details this important issue. The IRS guidance on the treatment of frequent flyer miles and other in-kind promotional benefits set out in Announcement 2002-18 can be relied upon by taxpayers since the Announcement was published in the official Internal Revenue Bulletin — Internal Revenue Bulletin No. 2002-10.
Announcement 2002-18: How Far Does It Fly?
Announcement 2002-18 addresses only frequent flyer miles and promotional benefits that are received for business travel and used for personal travel. It does NOT apply if frequent flyer miles are received, for example, from a bank as an incentive for opening a bank account. See Shankar v. Commissioner, 143 TC No. 5 (2014).
The IRS stated in the announcement, consistent with its practice at that point in time, that it would not assert that the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel gives rise to income. Very importantly, the Announcement also warns that “this relief does not apply to travel or other promotional benefits that are converted to cash, to compensation that is paid in the form of travel or other promotional benefits, or in other circumstances where these benefits are used for tax avoidance purposes.” (emphasis added). So for instance, if the employee converts those frequent flyer mile to cash, or the employer provides air tickets to various destinations to the employee as part of the employment package, or as an employment bonus, the cash or fair market value of the tickets must be included on the tax return as taxable compensation. The good news is that for most expats, these amounts will qualify for the “Foreign Earned Income Exclusion“.
Published August 15, 2018
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