Flight Crewmembers - Receipts and Recordkeeping

By the nature of their employment, pilots and flight attendants incur a large number of job-related expenses. Every tax season, organizing and deduct those expenses can be a cumbersome task. A common question that arises during tax season is, "What receipts do I need to keep?"  The answer to that question takes some investigating into a few of the IRS Publications that pertain to airline pilots and flight attendants. The most applicable IRS Publications for airline crewmembers are:

• IRS Publication 463 - (Travel, Entertainment, Gift, and Car Expenses)
• IRS Publication 529 (Miscellaneous Deductions)
• IRS Publication 552 (Recordkeeping for Individuals)
• IRS Publication 1542 (Per Diem Rates)
• IRS Form 2106 (Employee Business Expenses)

Publication 552 (Recordkeeping for Individuals) has some useful information about recordkeeping in general, but not a lot of pertains to our situation as an employee trying to deduct employee business expenses. In fact, in Publication 552, you come across the following statement:

If you have employee business expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses, for a discussion on what records to keep.

IRS Publication 463 is probably the most important publication that crewmembers will refer to, and one very important rule stands out in Publication 463 and should be noted by all. This rule states:

You cannot deduct amounts that you approximate or estimate.

For example, in the event of an IRS audit, when asked to explain your dry-cleaning expenses, you cannot say that you came up with a deduction of $260 because you typically get dry-cleaning service every week and it costs approximately $5.00 each time ($5.00 x 52 weeks = $260). That is an approximation or estimate and IRS Publication 463 forbids it. You need to do something called, "substantiating."That is basically a fancy word for documenting according to IRS standards.

The IRS also requires that your records are timely-kept. By this they mean you should record the elements of an expense near the time of the expense and support it with sufficient documentary evidence. You do not need to record the elements of every expense on the day of the expense. If you maintain a log on a weekly basis that accounts for use during the week, the log is considered a timely-kept record. You must also keep the record, for IRS purposes, for 3 years from the date you file the income tax return on which the deduction is claimed.

A study of the results of IRS audits leads to the conclusion that proper recordkeeping is perhaps the most important, yet most neglected, aspect of a person's taxes. The leading reason people lose an audit is poor recordkeeping, not over-deducting. Substantiating your expenses is very important if you are ever audited. Taxpayers need to substantiate each expense with IRS approved recordkeeping practices. Log each expense incurred in a record-keeping program that allows you to track and document each expense. Not doing so risks having legitimate deductions taken away.

Proper recordkeeping, according to the IRS, has some specific rules that need to be followed. The following comes directly from Publication 463:

What Are Adequate Records?

You should keep the proof you need in an account book, diary, statement of expense, or similar record. You should also keep documentary evidence that, together with your record, will support each element of an expense.

Documentary evidence. You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses.

Exception. Documentary evidence is not needed if any of the following conditions apply.

1. You have meals or lodging expenses while traveling away from home for which you account to your employer under an accountable plan, and you use a per diem allowance method that includes meals and/or lodging. (Accountable plans and per diem allowances are discussed in chapter 6.)
2. Your expense, other than lodging, is less than $75.
3. You have a transportation expense for which a receipt is not readily available.

In other words, according to Publication 463, you must have a receipt or other approved documentary evidence unless you meet one of the three exceptions above. The first one applies to your meal expenses. An accountable plan refers to the method that you get reimbursed for your meals (and lodging if applicable). Most pilots and flight attendants get paid a per diem rate for their meals and incidental expenses (M&IE) while their lodging is paid in full by the company. In that case, they can deduct M&IE but they cannot deduct lodging.

NOTE: You do NOT need receipts for meals if you use the standard or locality M&IE rates (i.e. EZPerDiem.com per diem calculation).

In other words, the per diem calculation provided by EZPerDiem.com is used in lieu of actual meal expenses for the year. The IRS is actually doing airline crewmembers a favor by allowing you to calculate your meal expenses this way, not only because it saves you the trouble of having to keep receipts on the road, but because it also saves you money; the government rates are typically higher than what you would actually spend on in food on a trip.

If you've ever used EZPerDiem.com for a per diem calculation, you probably know that the extra refund you get back from the per diem deduction is usually worth several hundred dollars. Not taking advantage of this deduction is equivalent to mailing the IRS an unsolicited check for a few hundred dollars every year!

Number two refers to the amount of the expense. Many airline crewmembers have probably heard that receipts are not necessary if an expense is less than $75. While that may be true in some cases, it is always a good idea to back up a deduction with a receipt or other approved documentary evidence. There are two good reasons for this.

Firstly, there are occasions, lodging for example, where documentary evidence is required regardless of the amount. Two, the tax code is somewhat ambiguous about the $75 threshold under certain circumstances. Case in point, Publication 463 is titled Travel, Entertainment, Gift, and Car Expenses. The $75 threshold is only mentioned in Publication 463, and is usually referred to in the context of a travel expense. Does that mean expenses that are not travel, entertainment, gift, or car related all need a receipt or does the following statement from Publication 552, (Recordkeeping for individuals) expand Publication 463 for all types of employee business expenses with regard to recordkeeping rules?

From Publication 552:

If you have employee business expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses, for a discussion on what records to keep.

This is one of those annoying gray areas embedded in the tax code that is begging for clarification. The concern is that it may be getting taken out of context in a lot of situations. The question is, does the $75 threshold only apply only to travel or does it apply to all employee business expenses? The answer is, we simply don't know. The reality is that you will probably get different opinions from different people. Because of this ambiguity, you are much better off with documentary evidence if you have it. If you do not have a receipt and the amount of the expense is less than $75, you are probably (emphasis on probably) going to be okay, but the risk of having an expense taken from you on the slight chance you are audited is going to increase without documentary evidence. In other words, don't through receipts away just because they are less than $75!

We know it can be challenging to keep proper records diligently, but EZPerDiem.com is striving to make this process simpler (maybe even simple). By merely using EZPerDiem.com for the standard city-by-city meal allowance (per diem calculation), you alleviate yourself of the responsibility of keeping any meal receipts for your trips. The other aviation-related expenses you incur can easily be logged in a spreadsheet and transferred to the EZPerDiem.com Expense Processor. By following these simple guidlines, you should be able to rest easy because your aviation-expense records will be able to support you in an IRS audit.