Preparing Your 2023 Taxes
By Dan White, Supervising Benefits Attorney, ALPA Representation Department, Retirement & Insurance Team
This article summarizes the rules for pilots in the U.S. regarding the taxation and deductibility of travel expenses for the 2023 tax year, for which individual tax returns are generally due by April 15, 2024. This article is intended to provide general information about the tax issues discussed. It’s neither legal advice nor tax advice, and it shouldn’t be treated as a substitute for individual tax advice. The federal tax rules relating to the matters discussed in this article are complicated, and all pilots need to consider their individual financial and tax situations. ALPA strongly encourages pilots to consult with their individual tax advisors concerning these tax issues.
A pilot flying the line is always on business travel. ALPA’s Retirement & Insurance Team 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), all or a portion of these payments or reimbursements may be excluded 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 trips or other 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.
Internal Revenue Code and related guidance contain complex rules relating to the substantiation of business expenses. Prior to 2018, pilots could deduct unreimbursed job-related expenses to the extent those expenses exceeded 2 percent of adjusted gross income. These deductions were eliminated beginning in 2018. However, 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 their 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 2023, the daily M&IE rates ranged from $59 to $79 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 2023, the transportation industry M&IE rate for travel is $69 for CONUS and $74 for OCONUS. The use of the special transportation industry M&IE rates eliminates the need to determine the standard M&IE rate for every overnight trip. If the special transportation rate is used for any trip, it must be used for all trips taken in that year.
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 $59. Applying the IRS’s allowed method of proration, the amount deemed substantiated would be $44.25 (.75 x $59) for Monday, $59 for Tuesday, and $44.25 (.75 x $59) for Wednesday.
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 2023, 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 2023 federal M&IE rate for Chicago is $79, so the maximum excludable amount for this trip is $158 ($79 x 2 days). The pilot is actually paid per diem of $168 ($3.50 per hour x 48 hours), so $158 is excluded from the pilot’s taxable income and is shown on the pilot’s Form W-2, Box 12, Code L. The remaining $10 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 per hour, and the pilot made the same two-day trip in 2023. In this scenario, the entire per diem payment of $48 ($1 x 48 hours) would be excluded from the pilot’s taxable income because this amount is less than the maximum excludable amount of $158. The pilot is no longer permitted to claim an itemized deduction of $110 for the difference between the excluded payment of $48 and the federal M&IE rate of $158.
Note: The examples in this article are for illustrative purposes only.
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.
For the benefit of your tax advisers, the official IRS rules regarding per diem rates for the 2023 tax year are found in IRS Notices 2022-44 and 2023-68. General information is also contained in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses; IRS Publication 1542, Per Diem Rates; and Revenue Procedures 2019-48 and 2021-63. These documents are available at www.irs.gov.