By Elizabeth B. Koby, Managing Attorney
ALPA Retirement and Insurance Department

As the 2001 tax year filing deadline approaches, the time has come again for an update on the U.S. rules governing taxes on U.S. pilot travel expenses and per diem payments. The purpose in providing this update is to explain how you may be able to claim an itemized deduction for your business travel expenses, whether or not you receive per diem payments from your employer.

In many cases, the amount of your itemized expenses for business travel may be "deemed substantiated," meaning that you need not keep records of the amount spent. The amount is deemed substantiated for a trip if you do not claim business meal and incidental expenses in excess of the applicable per diem rates published by the federal government ("M&IE" rates, see below), minus the amount of nontaxable per diem payments you received from your employer for that trip. If the amount of your business meals and incidental expenses is deemed substantiated in this way, however, you will still need to keep records proving that you were on a business trip on the days in question.

These complex rules are fully explained in "Taxation of Pilot Travel Expenses, Per Diem –Tax Year 1999" that may be found in the March 2000 issue of Air Line Pilot, as well as on ALPA’s web site. To reach it on the web, go to http://cf.alpa.org, then in the Member Logon area enter your member number and password, then select ALPA Departments, then select R & I, and look under Related Links for Retirement and Insurance. That article remains applicable, with the exceptions noted below, for the 2001 tax year. Of course, you are urged to consult your tax advisor when applying these rules to your situation.

In preparing your 2001 U.S. tax return, you will be referring to the federal government’s per diem rates that apply to business travel occurring during 2001. These per diem rates consist of two components, one covering meals and incidental expenses ("M&IE") and the other covering lodging expenses. Because your employer pays for your lodging separately, you will be concerned primarily with the M&IE rates.

The General Services Administration (GSA) issues the M&IE per diem rates that apply to the 48 contiguous states and the District of Columbia, collectively called "CONUS" (Continental

United States). For business travel to CONUS destinations in 2001, five M&IE per diem rates---$30, $34, $38, $42 and $46---apply, the same as for the tax year 2000. The M&IE per diem rates for other business travel destinations, collectively called "OCONUS" (for Outside CONUS), are revised monthly by the State Department (for all foreign countries) and periodically by the Department of Defense (for Alaska, Hawaii, and the U.S. territories and possessions). For many of the hundreds of OCONUS destinations listed, the 2001 M&IE per diem rates well exceed the maximum CONUS rate of $46. For example, following is a sampling of the OCONUS M&IE rates for July 2001; Amsterdam - $63; Athens - $63; Barcelona - $90; Beijing - $81; Bonn - $67; Dublin - $82; Johannesburg - $45; London - $82; Mexico City - $96; Moscow - $103; Oslo - $94; Paris - $77; Rome - $102; Sydney - $90; Tel Aviv - $102; Tokyo - $119; Vancouver - $87; Zurich - $89.

All of the 2001 M&IE rates are available via ALPA’s and GSA’s websites. To reach the CONUS and OCONUS M&IE rates through ALPA’s website, follow the instructions mentioned previously in this article. To access the CONUS and OCONUS M&IE rates through GSA's website, go to http://www.policyworks.gov/perdiem.

Besides the new M&IE rates, you need to be aware of a few changes when applying the rules explained in the article for the 1999 tax year to your 2001 tax returns. These are described below.

On August 31, 2001, the GSA published new M&IE rates for CONUS business travel effective for the federal government for its 2002 fiscal year beginning October 1, 2001 (FY 2002). For the private sector, these rates will apply to business travel in calendar year 2002, and also, at the option of an employee or employer, to business travel from October 1, 2001 through December 31, 2001. Thus, for CONUS business travel in the last quarter of 2001, you may either continue to use the set of M&IE rates applicable for FY 2001 or you may use the new set of M&IE rates applicable for FY 2002; however, you must use only one of these sets of M&IE rates for that quarter. In comparing the new CONUS M&IE rates for FY 2002 to the rates for FY 2001, the GSA states that 22% of the rates increased over FY 2001, 68% remained the same, and 10% decreased. Note that there is no similar rule regarding the last quarter of 2001 with respect to OCONUS rates, since these are updated monthly, rather than annually.

For the tax year 2001, employers and employees in the transportation industry may claim only 60 percent of their expenses for business meals, including expenses that are deemed substantiated by applying the federal M&IE rates. The 50 percent limit continues to apply to all employers and employees who are not in the transportation industry. (See IRS Form 2106, Part I, Line 9, or IRS Form 2106 EZ, Part 1, Line 5.) However, as in previous years, you will be entitled to take a deduction for business and miscellaneous expenses only to the extent that the total of such expenses exceeds 2 percent of your adjusted gross income. (See IRS Form 1040 Schedule A, Lines 20-26.) Among other things, your business expenses include your union dues as well as your business travel expenses.

Under the special rule applicable to employees in the transportation industry, the deduction limit is 60 percent for 2001, 65 percent for 2002 and 2003, 70 percent for 2004 and 2005, 75 percent for 2006 and 207, and 80 percent for 2008 and later years.

All other rules relating to an employee’s itemized deduction for business travel continue to apply, as described in the article for the 1999 tax year, with the following clarification. In determining the amount of your itemized deduction for business travel expenses, the amount deemed substantiated by the federal M&IE rates covers meals and "incidental expenses." Any incidental business expenses not included within the M&IE rates are separately deductible (subject to the requirement that your total business and miscellaneous expenses exceed 2 percent of your adjusted gross income). The GSA says the following incidental business expenses are not included within the M&IE rates (and, therefore, they are separately deductible): taxicab fares; telephone calls; and, for travel of 4 or more nights, your laundry, cleaning and pressing expenses. Included within the M&IE rates, however (and therefore, not separately deductible), are fees and tips for porters, baggage carriers, bellhops, maids and stewards.

As explained in the article for the 1999 tax year, the IRS provides an optional rule under which you (and other employees in the transportation industry) may apply a single CONUS M&IE rate in lieu of the five published CONUS M&IE rates, and/or a single OCONUS M&IE rate in lieu of the hundreds of published OCONUS M&IE rates. For the 2001 tax year, these optional standard M&IE rates remain at $38 for CONUS business travel and $42 for OCONUS business travel.

You may elect to apply the optional standard rate to all of your CONUS travel, all of your OCONUS travel, or all of your CONUS and OCONUS travel. For example, if you elect to apply the optional standard rate only to your CONUS travel, you may still apply the regular M&IE rates to your OCONUS travel.

For the benefit of your tax advisor, the official documents governing the taxation of pilot travel expenses and per diem payments applicable in 2001 are IRS Rev. Proc. 2000-39, issued Oct. 10, 2000, and IRS Rev. Proc. 2001-47, issued Oct. 15, 2001. You may also refer to IRS Publication 463, "Travel, Entertainment, Gift, and Car Expenses For use in preparing 2001 Returns," available at www.irs.gov.