With business travel ramping back up again, employers might start fielding questions from staff about the tax treatment of travel-related fringe benefits.
For example, when your employees fly on business, some may earn frequent flyer miles. Should your organization treat those miles as taxable if an employee ultimately uses them for personal reasons — such as a family vacation?
Many employers allow employees to use frequent flyer miles earned on business travel for personal purposes. Indeed, this can be an enticing fringe benefit for salespeople and others who spend time on the road.
Generally, employer-provided fringe benefits are included in an employee’s income unless the Internal Revenue Code provides a specific exclusion. However, the IRS has historically struggled with technical and administrative issues related to frequent flyer miles.
For instance, which miles are attributable to business expenditures and which are personal? If income is generated, how and when should it be valued? Because of such issues, the IRS announced in 2002 that it wouldn’t assert that taxpayers have understated their federal tax liability because of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to business or official travel.
As of this writing, the IRS has issued no additional guidance on the issue. And in the 2002 announcement, the tax agency stated that, if the policy is ever changed, any changes would be prospective.
Exceptions to consider
The IRS policy does have some exceptions. For example, it doesn’t 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.”
A conversion to cash might occur if an employee buys a ticket in coach class, uses frequent flyer miles to upgrade to first class and then submits a reimbursement request for the cost of a first-class ticket. Taxable compensation paid in the form of travel could also occur if the employer uses frequent flyer miles to buy plane tickets to a vacation destination and then gives those tickets to an employee. But if employees are simply using accrued points to buy their own vacations, doing so would seem to fall squarely within the policy.
Cash and cash equivalents
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 conversion of points into gift cards at a uniform rate or redemption of points for cash. Others bypass points altogether in favor of simple cash rebates.
Cash and cash-equivalent rewards generally wouldn’t meet the conditions for excluding a benefit as “de minimis” (that is, too small to be taxable). Consequently, employers shouldn’t 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 aren’t limited to “in-kind promotional benefits.”
If your organization has employees who earn frequent flyer miles on business travel, strongly consider creating a stated policy on whether they can use those rewards for personal purposes. From there, our firm can help you determine the tax impact based on the specific circumstances involved.