Preparing Your 2019 Taxes
By Ross Pollack, Benefits Attorney, ALPA Retirement & Insurance Department
This article summarizes the rules for pilots regarding the taxation and deductibility of travel expenses for the 2019 tax year, for which individual tax returns are generally due by April 15, 2020.
A pilot flying the line is always on business travel. As a reminder, under the Tax Cuts and Jobs Act, which became effective on Jan. 1, 2018, travel expenses are no longer deductible by the pilot. However, they’re still deductible by the airline. In addition, employer advances to and reimbursements of pilot travel expenses are generally not treated as taxable income to the pilot. ALPA’s Retirement & Insurance Department has put together the following information regarding travel expenses to assist you in preparing your taxes.
Taxation of per diem
Many of ALPA’s collective bargaining agreements provide that the airline will pay each pilot a fixed amount, often called “per diem,” to cover meals and incidental expenses (M&IE) that pilots incur while on a trip. When an airline makes these per diem payments (or otherwise reimburses pilots for travel expenses), the airline may exclude all or a portion of these payments or reimbursements from a pilot’s taxable income reported on Form W-2. The amount generally excluded from a pilot’s income is the amount that doesn’t exceed the federal per diem rates. Per diem payments paid for day or other non-overnight trips (trips that don’t require sleep or rest) and amounts paid in excess of the federal per diem rates for overnight trips are included in the pilot’s taxable income and are reported on the pilot’s Form W-2. Frequently, the amount of per diem the airline pays or reimburses isn’t enough to cover reasonable business travel expenses.
Expenses for “overnight trips”
For employer-paid travel expenses to be excluded from the pilot’s taxable income, the expense must be incurred while on a business trip that requires sleep or rest (an “overnight trip”). Expenses incurred on trips that aren’t overnight trips don’t satisfy this requirement. For pilots, the expenses at issue are usually M&IE expenses, because the airline pays for lodging directly or reimburses the pilot for it separately.
The Internal Revenue Code and related guidance contain complex rules relating to the substantiation of business expenses. Prior to the Tax Cuts and Jobs Act, it was important for pilots to be aware of these rules because they affected pilots’ ability to claim deductions for travel expenses that weren’t paid by the airline. Although pilots can no longer claim these deductions beginning in the 2018 tax year, the substantiation rules are relevant because they still apply to airlines, which may require pilots to substantiate travel expenses. Accordingly, any pilot who’s been required by his or her airline to substantiate expenses should continue to do so, unless informed otherwise by the airline.
Recognizing the burden of substantiating expenses, the IRS treats a designated amount of expenses relating to overnight trips as “deemed substantiated.” For amounts deemed substantiated, pilots don’t need to maintain records of the amounts actually spent while on the trip.
If the employer pays for lodging separately, then the expenses that may be deemed substantiated are those for M&IE. The amount that’s deemed substantiated is generally equal to the amount the federal government would pay its own employees for M&IE when they travel to the same locality or the amount determined under special M&IE rates applicable to transportation industry employees.
The federal government publishes standard M&IE rates for every locality in the world. The M&IE rates for CONUS (for Continental United States) can be found at www.gsa.gov, and M&IE rates for OCONUS (for Outside CONUS) can be found at www.state.gov. For 2019, the daily M&IE rates ranged from $55 to $76 for CONUS and from $1 to $299 for OCONUS. These rates may change on a monthly basis.
The IRS also provides special transportation industry M&IE rates. For 2019, the transportation industry M&IE rate for travel is $66 for CONUS and $71 for OCONUS.
What’s not included in the M&IE rates?
The “incidental expense” portion of the M&IE rates doesn’t include such expenses as transportation between places of lodging or business and places where meals are taken, telephone calls, laundry, cleaning and pressing, the mailing costs of filing travel vouchers, and payments for employer-sponsored credit card billings. These expenses, to the extent they constitute reasonable business expenses, are deductible by the airline as business expenses (subject to applicable limits).
Prorating the M&IE limit
The full M&IE amount is available only for a full calendar day of business travel, i.e., from 12:01 a.m. through midnight. For a partial day of travel, the pilot must prorate the applicable M&IE amount at 75 percent. Assume, for example, that a pilot’s trip begins at 11:55 p.m. on Monday and ends at 12:05 a.m. on Wednesday and that the pilot’s required rest occurred in cities with an applicable M&IE per diem rate of $51. Applying the IRS’s allowed method of proration, the amount deemed substantiated would be $38.25 (.75 x $51) for Monday, $51 for Tuesday, and $38.25 (.75 x $51) for Wednesday.
Itemized deductions no longer permitted
As mentioned, a pilot may no longer claim a deduction for business travel expenses that aren’t reimbursed by the employer.
Applying the federal M&IE rates
For an example of how the federal M&IE rates are applied, assume a collective bargaining agreement entitles a pilot to per diem payments equal to $3.50 per hour. Assume also that a pilot covered by the agreement flew a two-day trip in 2019, with report for duty at 12:01 a.m. on the first day, an overnight stay in Chicago, Ill., and release from duty at midnight on the second day.
The 2019 federal M&IE rate for Chicago is $76, so the maximum excludable amount for this trip is $152 ($76 x 2 days). The pilot is actually paid per diem of $168 ($3.50/hour x 48 hours), so $152 is excluded from the pilot’s taxable income and is shown on the pilot’s Form W-2, Box 12, Code L. The remaining $16 is included in the pilot’s taxable income and reported on Form W-2 in Box 1 (and Boxes 3 and 5, as applicable) as taxable wages. Alternatively, assume the collective bargaining agreement entitles the pilot to per diem payments equal to only $1.00 per hour, and the pilot made the same two-day trip in 2019. In this scenario, the entire per diem payment of $48 ($1.00 x 48 hours) would be excluded from the pilot’s taxable income because this amount is less than the maximum excludable amount of $152. The pilot is no longer permitted to claim an itemized deduction of $104 for the difference between the excluded payment of $48 and the federal M&IE rate of $152.
Note: The examples in this article are for illustrative purposes only.
For the benefit of your tax advisers, the official IRS rules for the 2019 tax year are found in IRS Notices 2018-77 and 2019-55. General information is also contained in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses; IRS Publication 1542, Per Diem Rates; and Revenue Procedure 2011–47. These documents are available from the IRS.
As with most matters concerning taxes, the federal law governing the taxation of pilots’ expenses and per diem payments is complex. All pilots are urged to obtain competent tax advice about applying the information in this article to their own situation.