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!
[card card-name='Citi® / AAdvantage® Platinum Select® MasterCard®' card-id='22144516' type='javascript' bullet-id='1']
TPG featured card
at Bilt's secure site
Terms & restrictions apply. See rates & fees.
| 1X | Choose to earn up to 1X points on rent and mortgage payments with no transaction fee |
| 2X | Earn 2X points + the option to earn 4% back in Bilt Cash on everyday purchases |
Pros
- Choice to earn up to 1 Bilt Point per dollar spent on rent and mortgage payments
- Elevated everyday earnings with both Bilt Points and the option to earn Bilt Cash
- $400 Bilt Travel Portal hotel credit per year (up to $200 biannually)
- $200 Bilt Cash annually
- Priority Pass membership
- No foreign transaction fees
Cons
- Moderate annual fee
- Designed primarily for members seeking a premium, all-in-one card
- Earn points on housing with no transaction fee
- Choose to earn 4% back in Bilt Cash on everyday spend. Use Bilt Cash to unlock point earnings on rent and mortgage payments with no transaction fee, up to 1X.
- 2X points on everyday spend
- $400 Bilt Travel Hotel credit. Applied twice a year, as $200 statement credits, for qualifying Bilt Travel Portal hotel bookings.
- $200 Bilt Cash (awarded annually). At the end of each calendar year, any Bilt Cash balance over $100 will expire.
- Welcome bonus (subject to approval): 50,000 Bilt Points + Gold Status after spending $4,000 on everyday purchases in the first 90 days + $300 of Bilt Cash.
- Priority Pass ($469/year value). See Guide to Benefits.
- Bilt Point redemptions include airlines, hotels, future rent and mortgage payments, Lyft rides, statement credits, student loan balances, a down payment on a home, and more.