Personally, I always tell my employer that I wish the would take my FF miles. Here is why.

The justification is, the miles were paid for the company, and it is part of employment. Fine, then, I will only travel during normal business hours and get paid for all travel time as well. No more working a 10 hour day, then driving to the airport for 3-6 hours of travel time. (or traveling on Sundays).

For starters, a sole proprietor cannot purchase anything from its owner since they are legally the same person. I think what you mean to say is use a personal asset to pay for a business expense.

By analogy to stock sales where one identifies which shares he is selling, a taxpayer could, and probably should, identify in his files the source of the 25K miles he is using to pay for the business fare. Here, it is in his interest to find the highest cost miles for the conversion (much like you want to find the highest cost shares in stock sales). That's probably the 25K butt-in-seat miles.

Unless the airfare is some below-market special like nsx identified above, I think it's fair to allocate the fares paid for that 25K of flying between travel and miles, with the 1.5 cpm being the value allocated to the miles.

That's a close call. Is an elite (25% bonus miles) getting a discount on miles or a discount on travel? I think one could fairly say that the travel is being discounted, so the allocation to the miles could be the same per mile, and the portion for travel becomes a bit smaller.

He can and should enjoy the miles earned on paid business tickets for leisure travel. This is precisely what the IRS has said it will not tax as income.

Yes, for 20 years and without any audits. This stuff isn't brain surgery.

I really don't think that choosing to fly with the airline would constitute consideration. The ticket in itself is a contract: I give you money in exchange for your agreement to fly me to my destination. When the airlines dangle a frequent flyer program out there, it is merely precatory, i.e., not a bargained-for component of a contract. I don't think there is any provisions about frequent flyer programs in the contract of carriage, so you would have a really hard time arguing to a judge that it was part of the ticket contract. Also, the airline has not required any consideration from you in exchange for being allowed to be in their frequent flyer program. It's not like you signed an exclusive contract - you are free to fly other airlines in the future.

There is no promise of upgrades, free seats, etc. just from joining a program. In order to be eligible for those benefits, you have to get the points/miles.

Stock purchases and stock sales are exactly that, purchases and sales with real money paid to acquire the stock and real money received when the stock is sold. There is no question how much money is involved, and thus how much is gained or lost in the end. That is far different from your imputation of value based on what you think went for the travel you did and what you think went for the miles you earned. Two people buying shares on the NYSE at the same time pay the same price for their shares and that price will be a matter of record. Two people flying in the same fare bucket on the same flight will pay the same for their tickets, but you imagine that they must be paying different amounts for the travel component if they are earning different amounts of miles. (BTW, 24,999 miles are worth far less than 25,000 miles, aren't they, though how much is a single mile by itself has negligible value. Just another of the many disconnects to undermine your analytic approach.)


You may think you got a helluva deal on your ticket because it cost you substantially less than what a ticket on another carrier would have cost you. It makes no sense, however, to describe it as a "below-market special." It is an irrelevancy here what the other carriers are selling tickets for, and hence whether you got a super deal or a lousy one.

What is with all the "fair" and "fairly" stuff. Maybe you think doing it your way would be the "fair" way to go about it, but what bearing does that have on what is permissible according to the tax code?


So he could "recycle" his miles and really make out by earning miles in the course of business travel, for which he is claiming a deduction, then turning around and "selling" ("using a personal asset to pay for a business expense" if you prefer) the miles back to his business, then turning around and "selling" the miles earned through that business travel back to his business, then turning around... Kind of a perpetual motion machine. Well, perpetual motion machines don't exist, and IRS doesn't allow the tax equivalent thereof.

And when people tell themselves it "isn't brain surgery" and chose to represent themselves rather than engage an attorney to represent them, you think they are displaying good judgment?

You haven't convinced me, and I haven't convinced you. So unless a CPA or a tax attorney weighs in with an authoritative opinion, there is no real point in continuing with the back and forth. You will do it your way, if you so chose, and I will not do it that way.

:D Point taken.

You misunderstood my analogy to stock share identification. That concept also applies to inventories (ever hear of FIFO, LIFO and other fun accounting acronyms?). I wasn't suggesting that this is just like stock sales, but rather that there is lots of precedent in the tax code for determining what part of a fungible pool you are selling or using.

In that context, I used those terms to mean essentially "reasonable" -- an important concept in tax law, and law generally.

I'm afraid you need a refresher. Remember this from above?

Publication 535, p. 4: "Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you." http://www.irs.gov/pub/irs-pdf/p535.pdf

If he buys the ticket for a business trip, he records its cost as a travel expense on Schedule C. He gets the miles for his personal account tax-free, but at no personal cost to him. His personal basis in those miles is thus zero, so if he were to use them for a business trip, he cannot deduct any cost with respect to those zero-cost miles.

Sometimes, sometimes not. It depends (the most common answer to legal questions).

I've supported my position with multiple citations to IRS publications, positions and tax law doctrines. You've cited to absolutely nothing in support of your opinion that this deduction "would almost certainly not stand up if you were to be audited". Do you display "good judgment" by reaching that conclusion without any reference to tax law authorities?

Answers (some) coming up
 

OK everybody, we had the session, we had your questions as of Wednesday 12am Singapore time, and I just need a quiet moment to post some answers. I will try to do sa asap, but as I just got back from the bar (not Bar:p:p) portion of this day, I won´t be able to do it tonite. I will also post the presentations of my colleagues on the panel as soon as I can and post the link here. Now, guess waht: today going down in the lift of the Sheraton Towers, what did I see: Flyertalk luggage tags.:)^:) Who´s here right now?

So did you let him/her know you were a FTer too by flashing the secret sign?:D

After you're done with the bar and any resulting after effects, please consider the untenable implications for the IRS if they were to reject my view on the need to allocate basis to the flight and miles portion of a personal travel ticket where the miles end up being used for business travel.

Imagine that Virgin America, in a bid to make an early splash with its transcon service, offers $400 RT SFO-JFK flight coupons. Once purchased, anyone can use them -- just make a reservation, show up at the airport, hand over the coupon and you're good to go. As part of this promotion, the purchaser of the coupon gets the miles earned, regardless of who flies.

Let's say that I'm crazy about New York, so I buy a big stack of these coupons. What I don't use, I'll give as holiday gifts.

After some time, I realize I have more of these coupons than I need personally. It turns out that many vendors supplying my sole proprietorship are happy to accept these coupons as payment for business purchases. They take each as though it were $400, and they don't mind that I end up with the miles.

Question: As I use these coupons for business expenses, how much per ticket am I allowed to deduct? Is it the $400 I paid for the coupon? If so, I've got quite a scam going. I'm personally keeping $75 or so worth of miles, so the payment of each coupon is really only costing me $325, yet I'm able to deduct my full cost of $400.

The flaw in this approach is obvious. When I hand over the coupon but keep the miles, the coupon I handed over did not cost me $400. It cost me that amount minus the value of the miles I kept.

This illustrates why it is proper and necessary, when using personal miles for business travel, to reasonably allocate the airfare between travel and miles. Failure to do so results in an improperly high basis for the travel and low basis for the miles.

Miles are given to the traveler not to the paying party.

I mostly agree with dhuey, with some minor quibbles.

When allocating the cost of a ticket between travel and miles: First, if it's a mileage run, the entire cost is for the miles.

Second, I'd estimate some underlying value for the travel (close to the full price), and also for the miles (1.5 cents each, perhaps). Then I'd proportionally reduce those to match the actual total amount paid.

So when an elite passenger pays the same fare and gets more miles, I'd allocate more of the cost to the miles, but at a lower per-mile rate.

I'm not sure what I'd do with unexpected bonus miles: e.g. I get a bump (that's another issue), and the airline rebooks me on a connection, so I earn an extra 1000 miles for the trip.

I agree that allocation should be done per ticket; sometimes, the airline is selling miles cheaper (e.g. when there's a 300% bonus). When that makes the value of the miles more than the full cost of the ticket, no problem; proportional reduction handles that case fine, it just generates some very inexpensive miles.

However, based on that treatment, if you buy a ticket for a business trip, I do not believe you get the miles associated with it for a $0 basis and deduct the full cost; unless, that is, you later use those miles (and not more expensive ones) for business use.

As for valuing miles won as an award: if the airline says the miles are worth $625, and you pay income tax on $625 for winning them, then clearly your basis in those particular miles is $625. It's quite possible to have identical things with a different basis; someone could have bought 100 shares of Google at $85, and another 100 shares at $500.

That might be hard to justify. When you do a mileage run, you are receiving the travel. It might be worth nothing to you -- indeed, it has a negative value since you travel only because you must in order to get the EQMs. Still, cost is not usually determined based on how much something is worth to you.

They should print on the coupon "Cash value 1/20 cent".

Problem solved.

Not so easy. The "cash value" is the amount the company is willing to pay in cash for the coupon. The "market value" is its value in the marketplace.

Remember the "50% off" coupons United had some years ago? You could get one on a $20 flight, and they were selling for $50 (and in some cases, worth over ten times that). Printing "no cash value" on them would only mean that United wouldn't (commit to) buy(ing) them back.

Interesting. That raises more questions in my mind about coupons, but they would be off topic.

Thanks in advance to NorthernAtlanticRacer !