Flying Under the Radar: Taxing Frequent Flier Miles

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Many professionals travel frequently.  Hence, professionals may accumulate various rebates, discounts, frequent flier miles or “cash-back” as a result of travel or credit-card incentive programs.  Over the years there has been some chatter amongst tax-preparers as to whether those travel-related or purchase perks are considering taxable income.  Let’s take a closer look at this risk management issue facing the accounting profession.

We start with the general rule: all income is presumed to be taxable. But like most issues facing professionals, the devil is in the details; i.e. what is “income.” Although we are required to pay taxes on lottery winnings, sweepstakes, and other valuable goods, are airline miles or credit card incentives considered a taxable income?  The answer: it depends.

Reportedly, the IRS has not issued any guidelines regarding the taxation of frequent flyer miles in over a decade.  In its 2002 IRS release, the IRS notes that there are “numerous technological and administrative issues” relating to frequent flier benefits and, as a result, “the IRS has not pursued a tax enforcement program with respect to promotional benefits such as frequent flier miles.” Miles accumulated simply for using a credit card or taking a trip are not taxable because they are “more like a rebate.”  A common analogy, according Michelle Elridge, an IRS spokeswoman, “is buying a $500 television at a retail store and receiving a $50 manufacturer rebate. It’s not income, just a deemed reduction of the cost of the television.”

Straight forward enough, right – miles are not considered income, right? Not quite.

Even if the IRS is not enforcing taxation of miles as “income,” it does not  necessarily follow that we need not report all types of miles.  According to U.S. News: “In the event airline miles were converted to any type of cash reward or benefit, they would have to be reported as taxable income.” Likewise, some professionals believe that offers “for free miles for signing up for credit cards” or similar deals with a “valuable inducement” should be considered taxable.

What about the scenario when an employee uses her personal credit card to make business-related purchases and then is reimbursed by her employer while earning rewards points or cash for the purchases? The IRS may consider this a taxable event or even “an abuse of the system.”

In 2012, Forbes considered this issue and published this handy guide.

  • Miles awarded for flying: non-taxable;
  • Miles awarded for rewards credit card use: “seem to be non-taxable”;
  • Miles awarded for business travel: non-taxable.
  • Miles awarded as part of a promotion: “potentially taxable”;
  • Miles awarded as prizes: “generally taxable.”

The lesson here is that there is room for reasonable accountants to disagree and there is no one-size-fits-all rule. Each professional must make a determination of the particular facts to determine what the situation requires.  Accountants, and all professionals, must be cognizant of the issues surrounding miles, discounts, cash-back programs and other awards when considering taxable “income.”