IRS Proposing New Tax Burden on Loyalty Programs

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.

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!
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