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.