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