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IRS Proposing New Tax Burden on Loyalty Programs

by on May 23, 2014 · 33 comments

in Airline Industry, Dining Programs, Hotel Industry, Travel Industry

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In the U.S. Department of the Treasury’s 2014-2015 Priority Guidance Plan (or business plan), the IRS is currently proposing that travel industry companies pay taxes on the front end of their loyalty program transactions, rather than waiting to pay those taxes until program members make redemptions. This shift in tax timing would mean that travel industry companies would almost surely pass these up-front costs along to their loyalty program members in the form of points and miles devaluations.

When an airline or hotel either awards or sells points, they book an expense that isn’t fully recognized until a redemption occurs. Since it may take a loyalty program member two or three taxable years to make a redemption (or possibly let their points and miles expire), the IRS is often forced to wait a long while to claim the associated taxes. Their proposed plan would result in a faster IRS payday, but an increased tax burden on airlines and hotels.

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In response to the proposed plan, this week a travel industry lobbying group composed of Airlines for America, U.S. Travel Association, the American Hotel & Lodging Association, and the American Resort Development Association sent a letter to the Treasury, including the following:

Unfortunately, the Internal Revenue Service (IRS) currently has under consideration a plan that would negatively impact loyalty programs. On August 9, 2013, the U.S. Treasury released the 2013-2014 Priority Guidance Plan (“business plan”). Included in the business plan was a project aimed at making changes to loyalty program accounting methods prescribed by the Treasury Regulations under Code Section 451 (“§451”). As you may know, travel companies, including hotels, airlines, and many others, have complied with settled law in the area of loyalty program accounting for decades. These same companies, and those they serve, are now under the threat of wholesale changes to the longstanding tax treatment of their loyalty programs.

Note that Code Section 451 is officially named the general rule for taxable year of inclusion, and refers to the tax year in which revenue is recognized. The letter goes on to express concern that a new tax on loyalty programs, rather than just a shift in accounting practices, could still be proposed:

Let us be clear, the IRS’ proposal to alter the tax treatment of loyalty programs will impose a significant new tax on existing and future loyalty points that travel customers enjoy and rely upon.

It remains to be seen whether there is an actual threat of a new tax rather than a proposed rule change, and an answer may not come quickly. The IRS must now sift through more letters and feedback, make responses and consider amendments to this proposed rule change. However, I certainly share the travel industry’s concern, since if the IRS wants to tax points and miles as they’re awarded (theoretically at the current 35% corporate income-tax rate) this could be a huge issue for loyalty program members.

This proposed tax rule change is just one more great reason to use your points and miles now, rather than sitting on them. Devaluations will continue to plague us, whether they’re initiated by the travel industry or imposed due to external cost considerations like new taxes. Earn and burn those points and miles while you can.

And in the meantime, if you want to help to stop this proposed rule change from seeing the light of day, reach out to the US Treasury on Twitter or Facebook - and let your voice be heard!

Disclaimer: The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.

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  • Ed

    The greed of the US government knows no bounds. Next time, think real hard whom you voting for.

  • JaneSmith100

    How many CEO’s and entire boards of airlines and hotels voted for this scmuck and the D’s? Easy to find out & I will & will post it at California State Politics on facebook, if you’re in California join us, but we are R/INDIE/LIBERTARIANS all together.

  • Heddy

    Since When Do We Vote for The Department of the Treasury?

  • Joe

    Nobama

  • Darin

    How about the IRS focus on getting their own employees and other federal govt employees to actually pay the taxes they owe?

  • LAKnight

    One more option to force the Govt respond back to us… Go to We the People page and start a petition (https://petitions.whitehouse.gov)

    We need 100,000 signatures to force the Govt responds though…

  • Susakajo

    Yeah, that should be a real priority with everything else that’s going on.

  • Michael

    I not used to the idiotic partisans on this site–please go home.
    The IRS is a fairly non-partisan institution, so claiming Obama and the democrats are behind this bureaucratic initiative is a little paranoid an belongs on Fox News sites, not here.

  • zjohn

    Greedy government. We don’t exist for them….though their actions would suggest they disagree. yuck…

  • Matt

    Who do you think picks the cabinet who in turn pick their directors of sub agencies???

  • Santastico

    We will soon pay taxes on the air we breathe. Wait and see!!!!

  • Brian C. Lee

    You do realize that these proposed changes almost certainly originated with career civil servants and bureaucrats, right?

  • Brian C. Lee

    These proposed rules almost certainly originated with civil servants, who aren’t elected.

  • Matt T.

    Pretty sure most of the airline CEO’s give to Repub causes, especially Gary Kelly and Doug Parker.

  • Darren

    I don’t understand why everyone seems to think this is wrong. It is a basic tenet of accounting that expenses and the associated revenue that they generate should be matched in the same time period. There is no reason that airlines should be getting away with a different tax treatment, it costs every other taxpayer money. The rules for airlines should be the same as for everyone else, and this fixes an unfair advantage that they have.

  • Rightwing Nut

    LOL. The only group in the USA that is against higher taxes is the Taxed Enough Already party. Wait, bite my tongue, they are extreme and evil. Common guys stop complaining already someone has to pay for all the wonderful bureaucrats.

  • V

    And in a very non-partisan way they were targeting conservative groups.

  • V

    Well because the revenue doesn’t occur till I actually fly. Loyalty points are like a retailer giving you a coupon. Its not revenue when they give it to you, its revenue when I actually go in the store and use it.

  • Darren

    There is also no actual expense until I fly, so they could delay the expense recognition until they are actually flown, so long as it matched with the revenue. This makes the most sense for miles that are earned by actually flying, however, for those that are sold to banks, etc. the revenue is received immediately when sold to the bank and should be recognized immediately.
    With your analogy of a retail coupon, you are correct, that there is no revenue until it is turned in and something purchased with it, however, the retailer also does not get to immediately expense all of the coupons they send out, only those that are actually returned and only when they are returned. Otherwise, a lot of businesses would send out a lot of coupons at the end of December and write them off in one year and defer their tax liability to the following year.

  • dd

    So if this proposal does take effect…would this make cards like the Arrival more valuable than UR, MR points? I would think airlines/hotels will significantly devalue/ eliminate these programs if they have to start paying taxes on them.

  • Chris

    We all know by now that this was a Fox News invention that never actually happened…

  • Julie Ann

    TPG, this is more an issue for the airlines on how they recognize revenue. Please don’t act as a lobbyist, the airline industry has enough already.

  • Jeffrey

    If you think IRS is non-partisan, you are dreaming. Sad : (

  • FirstClassFlyer

    100% correct. The only Democratic leaning airline is UA.

  • Rus925

    In response to: “The letter goes on to express concern that a new tax on loyalty programs, rather than just a shift in accounting practices, could still be proposed.”

    I’m pretty sure they’re saying that the new rules will impose a burden on the industry that’s tantamount to a tax, not that a new tax is on the table.

    Here’s a pretty good, somewhat readable explanation of how things work right now: http://www.us.kpmg.com/microsite/taxnewsflash/2011/Feb/Gift_Cards.pdf

    The deferral option is nice for businesses but also fairly arbitrary and a side-effect of the accrual method of accounting; practically, there’s no good reason for businesses to hold these revenues tax free for three years. Moreover, if this change brings in more revenue, theoretically the government doesn’t have to raise taxes somewhere else. But even if you don’t buy that, hopefully you can at least appreciate that this change would reduce complexity in the tax code, which we desperately need.

  • JaneSmith100

    Nope, I looked them all up, they are all Obama supporters.

  • JaneSmith100

    Nope, I looked them all up, they are all big Obama supporters, NOT Repubs. Easy to look up their PACs. Obama is big with ALL of them.

  • Joe

    What about the tax impacts on using your small business card (Chase Ink?) to buy GC for personal benefits? What are the IRS audit risks? No body seems to be talking about that.

  • RedbullF1fan

    The poor liberals just love their monster government. They see the current administration through rose colored glasses as honorable public servants, with the citizens’ interests at heart and only the best intentions. The truth is our elected officials are power hungry, parasites that can’t ever see a reason for lower taxes. They spend our hard earned dollars like a drunk in a stripper bar. The liberals love all the government provided services and are happy to criticize when anybody screams enough already! Get a job, get off the dole and pay YOUR fair share.

  • V

    For once I have found someone who understands how things work.

    I agree with you that expenses and revenue should be matched, which is definitely the case when miles are collected by flying.

    Now as far as miles that sold to the banks are concerned, I am not too familiar (never looked into it) with the accounting behind it…if they recognize revenue related to those miles right away, I think expense should be as well.

  • RedbullF1fan

    They are hostages to the Obama administration. If they don’t payoff the Democrats we’ll be flying on airliners powered by D cell batteries. Former FAA Admin turned airline, aircraft lobbyist Linda Daschle is a big left-wing progressive just like her husband Tom-former SD Senator, on the Transportation Committee. No conflict there!!

  • Rightwing Nut

    I might
    point out a drunk runs out of money and has to stop spending. Please the strippers need money and are
    working for it. Further, I like that
    drunk and the strippers way better than the current crop of liars (I mean
    politicians) that run Washington.

  • JaneSmith100

    Wow, keeping the blinders on 24/7 – that’s right, this administration is not corrupt. This administration didn’t sic the IRS on conservatives. Riiiight. How is that Kool Aid you’re drinking?

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