Many employers allow their employees to make personal use of frequent flyer miles earned on business travel. This can be a significant benefit. Generally, all fringe benefits that an employer provides to an employee are included in the employee’s income unless the Code provides a specific exclusion. But the IRS has struggled with technical and administrative issues related to frequent flyer miles such as which miles are attributable to business expenditures, and which are personal, and how to value any income.
Because of these issues, the IRS in 2002 announced that it would not assert that taxpayers have understated their federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to business or official travel. That policy apparently remains unchanged. The IRS has issued no additional guidance on this issue, and the announcement states that if the policy is changed, any changes will be prospective and not retroactive. The IRS’s policy has some exceptions. For example, it does not apply if travel or other promotional benefits 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.” However, if employees are simply using accrued points to purchase their own vacations, that seems to fall squarely within the policy.
Since 2002, credit card issuers have developed reward systems that are considerably more flexible than the frequent flyer programs that were the subject of the IRS policy. Some of these permit the conversion of points into gift cards at a uniform rate, the redemption of points for cash, or simple cash rebates. Employers should not assume that the frequent flyer guidance will also control whether employees must be taxed on the personal use of credit card points or rebates that were earned with business purchases under programs that are not limited to “in-kind promotional benefits.”
Stuart J. Oberman, Esq.
Stuart J. Oberman is the founder and President of Oberman Law Firm. Mr. Oberman graduated from Urbana University and received his law degree from John Marshall Law School. Mr. Oberman has been practicing law for over 30 years, and before going into private practice, Mr. Oberman was in-house counsel for a Fortune 500 Company.
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