Q: Last year, I took advantage of a complimentary resort stay that was offered to me. On another occasion, I paid an agent rate that was about 70% off the hotel's rack rate. Do I have to report the value of these stays as income on my federal tax return? What happens if I don't? Does it make any difference if the hotel or chain issues a 1099-MISC and sends me a copy?A:
The income tax effect of each trip depends on exactly how you obtained or earned it. In any case, industry practice is probably different from the strict letter of the law.
The free trip: If you earned it by paying for lots of business-related trips to hotels in that chain, the IRS considers it nontaxable. The IRS's Announcement 2002-18 notes that the service "will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent-flyer miles or other in-kind promotional benefits attributable to the taxpayer's business or official travel."
Frequent-flyer benefits are analogous to free or reduced-rate hotel stays under a chain's frequent-stay program, in that they are both in-kind promotional benefits attributable to your own business volume or status. This is not taxable income to you.
On the other hand, if the free stay was awarded by virtue of your or your agency's volume of sales of the chain's properties, the free stay is in the nature of a bonus commission or a prize. In that case, the fair market value of the stay is the taxable amount.
I have no doubt that this legal position will come as a surprise to many if not most agency owners and independent contractors, who consider a "freebie" to be free, which in turn means that they don't need to report it.
The "fair market value" of the free trip is something about which reasonable minds can differ, but according to the IRS, if a consumer would pay, say, $5,000 for the same trip, then that's its fair market value.
The 70% discount: If you get a 70% discount on a trip because all travel agents get that discount, such as for a familiarization trip, the IRS considers the discount to be nontaxable, just as buying any other product or service at a discount does not create taxable income to you. On the other hand, if a hotel chain or wholesaler awards you points for each sale, and if you can use, say, 70 points for a 70% discount on your own stay, then, unfortunately, the 70% discount is in the nature of additional compensation, which is taxable income.
As with the free trip, this legal analysis will undoubtedly surprise many agents. It is ironic that the trip you earn ends up costing you more (after taxes) than the trip you didn't have to earn.
The tax consequences can mean real hardships for front-line agents, who might owe the IRS a thousand dollars or more, which they don't happen to have lying around, just for taking a free or discounted trip.
A supplier's issuance of a 1099 does not technically change the income tax status of the benefit. If you don't report it and are audited, you could still take the position that the freebie or the discount was not taxable, although the fight would be costly and you would probably lose.
If you don't report income and the IRS catches you, there is a 20% penalty for under-reporting, plus interest. If you have questions, consult a knowledgeable CPA or tax lawyer in your state.