The Tax Cuts and Jobs Act of 2017 changed the tax treatment for business entertainment expenses. It made airline club lounge memberships no longer deductible to a business. But a bit of financial engineering would seem to make lounge access still deductible.
- While many provisions of this tax law are scheduled to sunset without additional congressional action, I do not believe this one is.
- I should caveat non-deductibility of airline club membership by noting that if a business reports the membership as a taxable fringe benefit on an employee’s W-2, then it would be deductible as employee compensation.
An interesting wrinkle is that a business’s credit card annual fees are deductible business expenses. Airline club lounge access is frequently bundled with premium credit cards, including small business credit cards.
- Delta and United have premium business cards with club access
- American and Alaska do not
Delta Sky Club LAX
Delta Sky Club LAX
It’s an interesting piece of financial engineering, actually. Credit card issuers effectively turn a non-deductible expense into a deductible one. I am not aware of any case law or private letter ruling addressing this directly, though tax professionals among my readers please correct me. I could see an argument for allocating the annual fee across deductible and non-deductible benefits of a company credit card, but I have not seen the IRS take this position.
This isn’t a new change, however a reader just asked me about it, and it struck me as an interesting enough juxtaposition that I should pass it along. What am I missing here?
The issue with the annual fee is that it has to be in the business name not the personal name. Personal expenses are not tax deductible. Thus the AA Executive Card that comes with lounge access the fee would be deductible as a business expense if in the company name, not the personal name. If in the personal name then that is income to the person.
IRS Publication 463
You can not deduct dues for membership in any club organization for Business, pleasure, recreation or other social purpose.
You cannot deduct dues paid to “Airline clubs”
@Gary: This is not financial engineering, it is just a reclassification of expenses..
But both United and Delta have business credit cards where the cars is in the business name and club access is included.
Don’t those business credit cards also have the name of the person who is the one who opened the account for themselves and their business?
I would assume that businesses that have credit card fees often expense the credit card fees for purposes of their financial statements and reporting revenue and income on tax forms/filings.
I think if you’re a sole proprietor you could deduct the annual fee as a business expense even though it’s in your own name.
I have been to airline lounges many times. I like them. However, I feel they are a waste of money and not too useful a perk. The food is often not so great with some exceptions. The lounges are not quiet like a quiet, unused gate. Maybe the shower is a good perk but only on red eye international flights.
Given the widespread idea that the “rich should pay their fair share”, airline lounges should be subject to punishing taxes. The people who use them are rich compared to cattle not using them,
@ Gary — Financal engineering? Seriously? It’s simply a business expense. Assuming you have an actual business, business credit cards should be used only for business expenses. If the card happens to cary an annual fee, then it is a business expense.
I’m all for legitimate business expenses being deductible, but in this case it seems that the business does not benefit at all from lounge expenses. The benefit is entirely for the individual. Just like buying first class seats, if you want to hang out in a lounge, just pay for it yourself.
Credit card fees are not tax deductible when the underlying fee is driven by lounge access or other perks. To the extent you deduct the fee, you would need to pick up the value of the lounge access (Up to what you paid) into income.
@Derek:
Yes, then let’s please count the fee-free Amex Plat cards given to US military service members that come with multiple avenues for lounge access. They should be counted as imputed income in that case and thus taxed as such.
@ jcil — First class airfare is an allowable business expense per IRS rules. Your employer can require you to fly econcomy, but the IRS doesn’t. It is a 100% legitamate business expense.
Does a business card have the person’s name because there can be multiple employees?
Sure, itemize your deductions and see how fast you will GET AUDITED….for myself anyway, since I’m not a businessman.
Financial Engineering Gary? As a sole proprietor you should be able tp write off AA Exec card as a Business Expense. Multiple accountants and tax professionals have said so.
I would hope that he’s not running most of his business expense volume on cards as a sole proprietor at this point and instead those expenses are going through for an LLC or other form or corporate structure that limits his personal liability from business operations and has other benefits.
I think this is fairly well known. I had a previous employer (a very large company that would be rigorous about this sort of thing) that offered frequently-traveling employees the choice of a paid airline club membership or the company paying for the fee to upgrade their corporate Amex to Platinum, and the former was taxable income to the employee while the latter was not.