Some small business owners wonder if they can claim a tax deduction when they use frequent flyer miles to book a trip. This is the flip side of a question I addressed yesterday, whether the miles and points you earn need be reported as taxable income. I think today’s issue is far more interesting because you can actually take actions that work in your favor.
I am not an attorney, tax specialist, or other financial advisor. You should probably contact your own advisor if you have these concerns. But I can tell you what I’ve learned over the years and how I interpret it.
Is there even any value to deduct?
I explained yesterday that most miles and points are not tax deductible. At least one bank, Citi, chooses to send out 1099s to its customers who earn a lot of miles through credit card sign-up bonuses. But that’s an isolated case. Most banks don’t do this, and the IRS has a stated position that you don’t owe taxes on miles earned through personal travel, business travel, or ongoing credit card spend since these qualify as rebates.
If you don’t owe any taxes on the miles when you earn them, it would appear self-evident that you can’t deduct the value of those miles when you redeem them.
Think about it. A tax deduction isn’t a flat amount deducted from your taxes. That’s more accurately described as a “tax credit.” Instead, a tax deduction is an adjustment to your net income. If the gross income of your business is $10,000 and you spend $2,000 to earn that $10,000, then you really only earned $8,000. You pay taxes on $8,000.
Some people might try to say they redeemed 100,000 miles to book a ticket that would otherwise cost $5,000, and so they want to claim a $5,000 deduction. Good luck with that. Did you also report those 100,000 miles as $5,000 in gross income when you earned them? I didn’t think so.
You can’t deduct something that has no value. And if you want to assign value to your miles, then you’re effectively telling the IRS that they also ought to tax them when you first earn them.
I see only two cases where you could legitimately deduct the value of an award ticket. One is if you buy miles and then redeem them for an award, but you run into some serious questions of how you separate your “business miles” from your “personal miles” if they’re all mixed into the same account. It seems like an accounting nightmare. The second case is when a bank like Citi files a 1099 that makes you liable to pay taxes for a sign-up bonus. You could reasonably deduct the value of those miles, and you have the paperwork to back it up. If Citi says you earned 50,000 miles at a value of 2.5 cents each — a taxable amount of $1,250 — then you could claim a deduction on only those 50,000 miles and only at a value of 2.5 cents.
You can still deduct some award travel expenses.
Every award ticket comes with associated fees and taxes. Those can be deducted if you booked the trip for legitimate business purposes; your fare is merely much lower than it would normally be. However, this is a more complicated topic and one where you would definitely want to consult a qualified professional. I am not a qualified professional, just a guy on the Internet.
For example, if I booked a trip to a conference in Berlin and paid $400 in addition to redeeming 100,000 miles, then I would deduct $400 — not the $5,000 list price of a regular business class fare. Or if I had booked a regular coach fare, and then upgraded with miles and a $600 co-pay, I could deduct both the coach fare and the co-pay.
Some tricks help when traveling with a companion.
I occasionally bring my wife along on trips that otherwise qualify as business travel. My wife isn’t significantly involved in my business, and her travel expenses are not deductible. But if I need a hotel room and a rental car to do my job, I can still deduct those expenses despite the fact she sleeps next to me and rides shotgun. I also can do things like book myself a paid fare and redeem miles for my wife’s travel. Our travel costs are lower on average, while I maximize my deduction. It would be a mistake to use miles for my own travel and pay cash for her fare.
On a related note, when I use a companion fare, I will ensure that I am listed as the primary traveler so that my wife pays the discounted price. Alaska Airlines even breaks down the itinerary in the receipt so you can clearly see that I paid a separate, more expensive fare.
Taxes really aren’t that difficult. You calculate your gross income minus your expenses and pay a percentage on the net income. If you didn’t pay for your miles — because you got them as a tax-free “rebate” — then they aren’t a real expense.