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Doctor’s Beware Taxation on Rebates

[By Staff Writers]

In the past decade or so, several companies has been marketing a culinary twist on airline frequent flyer programs—a kind of frequent-eater program.

Under the program, doctors who love to hold “business meetings”, and other diners use their regular credit cards to charge meals at participating restaurants, and the program sends them a rebate check for 20% of the bill.

Not All Gravy

While a 20% discount on restaurant meals sounds appealing to most everyone, you should be aware that it’s not all gravy. In some cases, the IRS is likely to take the position that those rebate checks represent taxable income to a medical executive who is using the program for business dining.

The IRS has not specifically addressed the issue of rebates on restaurant bills. But, in a private letter ruling back in 1993, it did give examples of when cash frequent flyer awards will be taxed [Ltr. Rul. 934007]. Here are some examples:

Example 1—

Your medical practice buys you tickets for a medical conference trip. The tickets entitle you to a cash payment under the airline’s frequent flyer program. If you do not turn the cash payment over to your company, the IRS says you have received a taxable fringe benefit.

Example 2—

You pay for air flights for which you take a business expense deduction. You subsequently receive a cash frequent flyer award. In this case, the IRS says you have taxable income to the extent that your prior deduction saved you taxes.

Back to the Table

Now, let’s get back to the discount dining program. By analogy to the IRS rulings, if you are reimbursed by your practice for the full amount charged on your credit card, the IRS will view the 20% rebate check as a taxable fringe benefit that must be reported on your tax return.

Or, suppose you are a self-employed doctor and take a deduction based on the full amount of the meals charged on the credit card. The cash rebate would be taxable to the extent the deduction produced tax savings. (Note: Since only 50% of the cost of business meals is deductible, only 50% of the rebate check will have produced tax savings.)

Practice Angle

How your medical practice decides to address the issue of dining discounts may be more a matter of tactics, than taxes.  In theory, allowing its employees to pocket their dining discounts could jeopardize the tax-free treatment of business meal reimbursements for all employees.

For example, in a 1995 ruling, the IRS said that a company’s travel reimbursement arrangement did not qualify for tax-free treatment because employees were permitted to retain frequent flyer awards for their own personal use [Ltr. Rul. 9547001].

However, the ruling aroused a storm of controversy, and higher-ups at the IRS quickly announced that they would reconsider the ruling in limbo. But, it is very likely that the company in question triggered its own tax troubles by making the right to retain frequent flyer miles an official part of its reimbursement plan, rather than an unofficial “perk” for employees.

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Assessment

The IRS may be less likely to raise the tax issue if a medical practice plan has no policy on rebates and awards, or officially requires employees to account for them to the company. And so, is this an example of the “friendlier IRS” that a former tax-commissioner spoke about, or that was mentioned in a previous Medical Executive-Post? Did we miss anything else? Has anything changed recently? Please opine and comment?

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OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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• FINANCE: Financial Planning for Physicians and Advisors
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• Dictionary of Health Economics and Finance
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• Dictionary of Health Insurance and Managed Care

Filed under: Accounting, Investing, Taxation | Tagged: IRS, rebate taxes, tax rebates | Leave a comment »