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 firstname.lastname@example.org or (979) 421-9297.