Author Archives: Carl Hartung

Selecting the Right On-Line Per diem Calculator

by Larry Lonero, E.A., Southwest Airlines Captain

As a flight crew member you may not understand the tax rules that govern per diem and meal deduction reporting on a tax return. But most of us understand that it is important to report them correctly. Misreporting these items on a tax return can cost you hundreds of dollars (or more) in lost deductions or, at worst, subject you to audit for non-compliance. Getting these right on the tax return is important! Most crew members also know that it is important to use an on-line per diem calculator in order to make the complicated calculations required.

Why Use an On-Line Calculator?

The IRS allows you to calculate a meal allowance using three different methods. The “federal M&IE rate” method (sometimes called the “overnight city” method), the “special M&IE rate” method (only allowed for transportation industry workers) and the “high-low” method are all allowable methods to calculate your deduction. While each method has its’ pros and cons one thing is constant – they each involve compiling a large amount of data and extensive calculations. On-line per diem calculators can simplify the process.

On-line per diem calculators are used by both tax accountants and taxpayers self- preparing their tax returns. Using an on-line calculator helps keep accountant fees down by saving time. It also ensures accuracy.

Aren’t All Calculators the Same?

There are about a dozen or so web based per diem calculators that I know of. I have analyzed most of them through the years. Many of the on-line calculators are run by fellow flight crew members. I only know of two that were actually developed by tax accountants. A few of them allow use for free but most charge a reasonable fee to use. They vary in complexity, some requiring manual entry of your flight schedule while others have the ability to import flight schedules automatically.

Most of us assume that these on-line calculators all do the same thing. But nothing could be farther from that premise. Most of them only calculate a meal allowance using one method – the overnight city method. You will never know if you are getting your largest allowable deduction if your on-line calculator does not calculate all methods allowable. PerDiemMax.com is the only web based calculator that I know of that calculates using all allowable methods.

Several airlines provide their employees with free per diem reports. Delta and United are among those airlines. However, these come with a limitation. These per diem reports only calculate using the overnight city method. Users of these free reports may find it worth the $30 or $40 dollars to use a web based calculator that provides all of the calculations.

If It’s on the Internet it Must Be True

Amazingly (or maybe not), several of the web based per diem calculators produce inaccurate calculations. We routinely amend tax returns that were prepared using inaccurate per diem reports. The Southwest Airlines Pilots’ Association (SWAPA) provides a free per diem calculator to its’ members that is inaccurate. This “free” SWAPA report has been costing its’ users hundreds of dollars in deductions for years. I have represented several crew members in audit that self-prepared tax returns using a web based calculator that was inaccurate.

Several factors contribute to these inaccurate calculators. First, as I previously mentioned, many of these calculators were developed by pilots that are good at web development but are not licensed accountants. I have spoken with some of these pilot developers and have found that they are not informed on tax law. Nothing against pilots – I are one! I just happen to be a licensed accountant, as well. It’s important to choose a per diem calculator developed and run by accountants.

Another factor contributing to inaccurate per diem calculators is that many of the developers have used IRS Publication 435 as their guide. The technical guidance on calculating meal deductions is contained in Revenue Procedure 2011-47. Rev Proc 2011-47 is an extensive and complicated document that dictates how these calculations should be made. IRS publications are not controlling and are published for information purposes only. They commonly contain non-compliant guidance. Publication 435 contains inaccurate guidance that conflicts with Rev Proc 2011-47.

What if I use Turbo Tax?

If you prepare your own taxes using TurboTax or a similar program, the PerDiemMax Annual Report explains exactly how to enter this on the correct forms. However, TurboTax users beware! Your meal allowance and per diem deduction MUST be reported on Form 2106 (not 2106EZ). For some reason, TurboTax does not always recognize that you should be reporting these items on Form 2106. The bottom line for self-preparers — if you are not reporting your meal allowance and per diem deduction on Form 2106 your tax return is non-compliant and you may be costing yourself money!

It’s fairly simple to ensure that the complexity of per diem and meal expenses doesn’t render your tax return non-compliant or cause your tax bill to be higher. I highly recommend you use an on-line per diem calculator whether you prepare your taxes yourself or use a C.P.A., Enrolled Agent or other tax professional. Select a high-quality calculator developed and run by accountants. And beware – the “free” calculators may be the most expensive ones you can use!


Larry Lonero, E.A. is an Enrolled Agent licensed to practice before the IRS. He has been a tax consultant and preparer since 1987. Larry is a Fellow of the National Tax Practice Institute and the General Partner of Lonero & Associates, LLC (a DRDA CPA’s affiliated firm). Larry has been a professional pilot for 34 years and is a Captain for Southwest Airlines based in Houston, TX. He can be reached at larry@lonerotax.com or (979) 421-9297.

 

Tax Advantages for Airline Crew Members – How Per Diem Works (Part II)

by Larry Lonero, E.A., Southwest Airlines Captain

In our previous blog we addressed the tax topic of per diem and meal deductions for flight crew members and its’ complexity. Improper tax reporting by taxpayers who self-prepare their tax returns or by accountants unfamiliar with this part of the tax code can cost taxpayers hundreds of dollars in lost deductions – or worse – the possibility of audit and additional penalties and interest for non-compliance.

In this article we want to embrace the complexity of the tax regulations and use them to our advantage as flight crew members to lower our tax liability. In this article we will make the complicated simple (OK, maybe not simple, but simpler!). And we will provide you with some tools that make it easy for you to do this.

As you recall, the basic tax premise is that the IRS allows crewmembers to take a deduction for meal expenses while traveling. You then reduce that meal expense by the amount of per diem that was paid to you by your airline. The difference is then taken as a deduction on your tax return, helping to lower the amount of tax you owe. It sounds easy, but the IRS has laid out very detailed and somewhat complicated regulations on how you must report and calculate these items. First, let’s look at how the meal deduction may be calculated and how it must be reported.

There are several ways the IRS allows you to determine your meal deduction. The first, and typically the least advantageous for you, is to keep receipts for every meal you pay for while traveling overnight on duty. You total those receipts at the end of the year and that is your meal allowance. That requires you to keep receipts for the Starbucks coffee you bought at PHX and the Wreck sandwich you bought at Potbelly’s at MDW. Every receipt. Every day. As you can see this would be a record keeping nightmare. There are several alternatives that are much simpler in some ways (think record keeping) but more complicated in other ways (think math!). But these alternatives almost always produce a larger deduction for you.

Did you know the IRS will allow you to take a deduction for a meal that you didn’t pay for?

The IRS allows you to use several alternate methods that calculate a meal “allowance” or deduction whether you incurred that meal cost or not. There are several advantages to using these alternate methods. First, there is no requirement to keep receipts. And often these allowances are more than you actually spend out of pocket. Let’s take a brief look at these various alternatives.

Federal M&IE Rate Method

The Federal M&IE (Meal & Incidental Expense) Method is commonly referred to the “overnight city” method. This method allows you to take a meal deduction for an amount that is based on which cities you overnighted in and the dates you were in those cities. The federal government publishes “federal per diem rates” for most localities around the world. You calculate the government published rate for each city you overnighted in. The total of those rates for the year is your allowable meal deduction. It is important to note that you may only take 75% of the per diem rate on the first and last day of each trip. This is often the most advantageous method to use since it calculates a very generous meal allowance. Because these calculations can be extensive most accountants and self-preparers use an on-line per diem calculator, such as PerDiemMax.com, to make this calculation. See our blog on per diem calculators here.

The Special Transportation Industry Method

The IRS allows a special method of calculating a meal allowance for transportation industry workers. The “special M&IE rates” method allows you to take a standard rate for each day of travel regardless of where you overnight. This method applies a standard rate based on whether you overnighted in a domestic (CONUS) or foreign (OCONUS) city. You apply that rate to the number of days you overnighted CONUS/OCONUS to calculate your meal allowance. There is no first day/last day adjustment using this method. This special travel industry rate is higher than the rates allowed for non-travel industry business travelers. It is important to be aware of this special method and compare it to the overnight city method to determine which is more beneficial.

One More Flight Crew Benefit

There is one more nuance in the tax code that flight crew members benefit from. No matter what method you use to calculate your meal allowance the tax code only allows normal business travelers to deduct 50% of it. However, as a transportation industry worker you can deduct 70%. This is an oft overlooked benefit by those not familiar with the intricacies of the tax code or transportation industry.

Which Method Should be Used?

The good news is that you may use whatever method provides you the largest deduction. The only caveat is that you must use that method consistently over the entire tax year. So, calculate all methods and select the one that benefits you the most. This is where a good on-line per diem calculator, such as PerDiemMax.com, that calculates every available method will pay dividends.

Beware of the Mine field!

One mistake that many self-preparers make is using the guidance found in IRS Publication 463 to report per diem and meal deductions. The controlling guidance for calculating meal deductions is actually found in Revenue Procedure 2011-47. Interestingly, IRS Publication 463 gives guidance that is not compliant with Revenue Procedure 2011-47. As strange as it sounds, following guidance in the IRS publication instead of the IRS published revenue procedure can land you in hot water.

It is important that you or your tax professional have a thorough understanding of the tax code and how it addresses crew member tax issues. At the very best, mistakes reporting these items can cost you hundreds of dollars (or more) worth of deductions. At the very worst they can render your tax return non-compliant resulting in the possibility of audit, and additional penalties and interest.


Larry Lonero, E.A. is an Enrolled Agent licensed to practice before the IRS. He has been a tax consultant and preparer since 1987. Larry is a Fellow of the National Tax Practice Institute and the General Partner of Lonero & Associates, LLC (a DRDA CPA’s affiliated firm). Larry has been a professional pilot for 34 years and is a Captain for Southwest Airlines based in Houston, TX. He can be reached at larry@lonerotax.com or (979) 421-9297.

 

Tax Advantages for Airline Crew Members – How Per Diem Works (Part I)

by Larry Lonero, E.A., Southwest Airlines Captain

In this two-part blog we will make sense out of a somewhat complicated tax concept and explore ways to turn it to your advantage. Airline crew members face many unique tax issues. One of the most commonly misunderstood (and mishandled) issues is the subject of per diem and meal expenses. Almost without exception, as flight crew members we all receive per diem from our employers to reimburse us for the cost of meals while traveling on duty. The tax code and tax regulations dictate how we must report the taxability (or non-taxability) of the per diem we receive and dictate how we may calculate and deduct the cost of meals while traveling.

Good News and Bad News

The bad news is that the tax code governing per diem reporting and meal deductions is complicated and ample. The good news is that with a thorough understanding of these rules we can apply tax strategies that will benefit airline crew members and lower your tax liability.

Our firm amends many tax returns each year for new clients that, in previous years, incorrectly reported per diem and meal deductions on their tax return (or did not report it at all). Many of the returns I amend were incorrectly prepared by C.P.A.’s, Enrolled Agents and other tax professionals, illustrating its’ complexity. I have also represented taxpayers in audit before the IRS that incorrectly reported these items (or failed to report them entirely).

Further complicating this issue for accountants is that regulations stipulate differences for flight crew members vs. regular business travelers in how these items must be reported on the tax return. Unless your accountant is well versed in the nuances of how the code treats flight crew members there is a chance that errors may occur. It is common for accountants to apply the wrong set of rules to flight crew members’ tax returns simply because they did not know the difference.

Incorrectly reporting per diem can result in two major issues. First, your income tax return will not be compliant with the federal tax code leaving you open for audit, and possibly penalties and interest. Second, if you do not apply the rules correctly or take advantage of the strategies available in claiming allowable meal deductions it could cost you a few hundred dollars, up to as high as $2,000 in additional tax owed.

To help understand this topic let me explain how the IRS treats travel expenses for “Transportation Workers.” The IRS allows crewmembers to deduct the cost of meals you incur while traveling. You then reduce that meal cost by the amount of per diem that was paid to you by your airline. The difference is then taken as a deduction on your tax return, helping to lower the amount of tax you owe. Sounds simple, and at its’ core it is. However, the regulations are very specific on how you may calculate your meal deduction, how you must report the per diem reimbursement and how much of the resulting deduction you can take. In our next blog we will get into some of the details on how this is done, such as the various ways you can calculate your meal costs, how you must “prove” the meal deduction to the IRS and some special rules that benefit flight crew members.

Nothing is ever easy regarding taxes. And the IRS is ever-present, ensuring they always get their share of your tax dollars. Many flight crew members have run afoul of the tax code trying to report per diem and meal deductions (or trying to avoid reporting these items). However, even though the tax code makes it complicated, understanding how the code should be applied to crew members and applying the special strategies available can save you hundreds, if not thousands of dollars. Using an accountant that is experienced in these issues will keep you flying high.


Larry Lonero, E.A. is an Enrolled Agent licensed to practice before the IRS. He has been a tax consultant and preparer since 1987. Larry is a Fellow of the National Tax Practice Institute and the General Partner of Lonero & Associates, LLC (a DRDA CPA’s affiliated firm). Larry has been a professional pilot for 34 years and is a Captain for Southwest Airlines based in Houston, TX. He can be reached at larry@lonerotax.com or (979) 421-9297.