TAXATION OF
FREQUENT FLYER MILES
ANNOUNCEMENT
2002-18
Prepared by: Tilda Kaplan
Mercer Human Resource
Consulting
Atlanta, GA
In
Announcement 2002-18, February 20, 2002, the Internal Revenue Service indicated
that frequent-flier miles earned from business travel, but used for personal
purposes, will not be taxed as income.
This relief does not apply to travel or other promotional benefits that
are converted to cash, or to compensation that is paid in the form of travel.
Background:
·
In
1981, American Airlines started the first ‘frequent flier’ program.
·
During
the ‘80s, the IRS issued conflicting messages about the taxability of award
miles.
·
In
1993, in a private letter ruling, the IRS described mileage earned through
employer-financed business travel as a taxable fringe benefit.
·
In
November 1995, the IRS gave similar advice to the public (technical advice
memorandum: TAM 9547001). The TAM
indicated that an employer’s policy of allowing employees to keep and use
frequent flier miles for personal travel resulted in taxable income to the
employees. No guidance on how to value the mileage or report to the government
was issued so the advice was, for all intents and purposes, ignored.
Current Status:
The
IRS cited the following issues as reasons that led to Announcement 2002-18:
·
Timing
of income inclusions – would award miles be taxed at the time of issuance or at
the time of use?
·
Valuation
of income inclusions – what price should be assigned for tax purposes to a
ticket paid for with award miles?
·
The
basis for identifying personal-use benefits attributable to business expenses –
how can business miles within a single account be distinguished from personal
travel or non-travel (e.g., credit card acquired) miles?
The Future:
So,
what can we expect in the future?
Apparently there still is a chance of additional guidance. The announcement indicated that future
guidance could reflect a different point of view but that any future guidance
on the taxability of these benefits will be applied prospectively only.
So,
happy traveling…for now.