Transportation industry tax savings: special tax benefits for pilots and mariners.

Editor's Note: Martin A. Kapp is a Los Angeles based CPA who specializes in working with taxpayers in the transportation industry, including mariners, airline pilots, locomotive engineers and others. In 2000, Kapp went to U.S. Tax Court in Washington, D.C on be half oftwo clients, Capt. Mann Johnson (International Container Ship) and Capt. Jim Wrestling (Alaska TugBoat) over the legal issues of mariners claiming automatic travel deductions without receipts while underway. The court agreed that these travel deductions have been legally available since 1927 when Congress first allowed travel incidental deductions.

In May 2000, the U.S. Tax court settled the legal issue of allowing mariners to claim an almost unlimited amount of travel deductions while working away from home, without having to produce any receipts, the same as for other transportation workers. Previously, conventional wisdom was that sailors could not claim travel expenses since meals and lodging are provided at no cost. We proved that the law allows a travel deduction for lodging, meals and/or incidental expenses.

Tax Break for Mariners

The Tax Court's decision left no room for doubt that every qualified mariner can claim incidental expenses by using the published incidental rates. They also can claim other legitimate travel deductions without having to keep any receipts for expenses under $75 per IRS Notice 95-5 0.

Does this mean that every mariner qualifies for additional travel deductions? First, we need to qualify the word "travel." Travel means being away from home long enough to be released from duty in order to obtain "necessary rest or sleep." Thus, someone working on a gambling boat on the Mississippi River that goes for an evening sail does not qualify because he goes home to sleep. For mariners who work aboard a vessel for 180 days, travel-related tax deductions now al lowed by the U.S. Tax Court and the IRS seem to range between $4,000 and $10,000, depending on the ports visited and other travel and incidental expenses incurred.

Tax laws allow four methods to compute incidental travel deductions: 1) add up actual receipts; 2) CONUS/OCONUS rates established by the federal government on a worldwide city-by-city basis; 3) transportation rates; and 4) high/low rates for cities located within the lower 48 states.

IRS Notice 95-50, issued in 1995, states that each recorded incident under $75 is also "deemed substantiated" without receipts, and it is possible to have several entries a day. "Although every element of each separate expenditure must generally be substantiated, documentary evidence is not required for separate expenditures of less than $75, except lodging while away from home."

Where do travel deductions begin and end? The Court agreed that "deemed substantiated" travel deductions begin and end at a mariner's front door, wherever that happens to be. So, if you live in Arizona but ship out of Seattle, all travel expenses to and from Seattle are fully deductible on your federal return for the entire time you are away from home. Lodging receipts still are required, but no receipts are required for meals or incidental expenses. The Tax Court also allowed the sea captains to claim all of their time aboard their ships, not just the days spent in port.

Why don't more mariners take advantage of these published Rev. Proclamations and Tax Court decisions? It takes approximately 40 hours to calculate a typical mariners qualified travel deductions. The typical professional tax preparer cannot afford to invest the majority of a week's work to compute just one customer's travel deductions. I had to write a computer program to help my clients take advantage of our Tax Court victories.

Investment in Private Pilot License May be Deductible

Is it possible that the money spent in getting a private pilot or instrument ticket can be deducted from taxes? There are two rules that should be applied anytime you are considering an educational write-off:

* Education costs are deductible if the education maintains or improves skills required by the taxpayer in the taxpayer's trade or business, including the trade or business of being an employee; and

* The education must not train you for a new occupation. Pilots obviously can write off the expenses necessary to keep them current, refine their skills, or acquire a new rating. Those who don't fly for a livelihood may also be able to take this deduction--provided there is a direct business need.

A traveling salesperson, for example, who needs to get to remote locations quickly or to areas not served by commercial airlines should be able to demonstrate the direct relationship the IRS looks for. If you want to try to claim this deduction, try to acquire the remote clients before you finish your private pilot lessons. You need to show that the flying lessons were the result of acquiring these clients, not the other way around.

A pilot who qualifies for an education deduction for a private and/or instrument rating will have difficulty in writing off a commercial rating. A commercial certificate qualifies the taxpayer to become a working commercial pilot--a new occupation.

Martin A. Kapp, a Los Angeles based CPA who specializes in the transportation industry, may be reached at 800-728-1040.