When an employee travels for business purposes, the employer may grant a per diem
allowance for lodging, meals, and incidental expenses. This option can simplify record-
keeping for the employer. Furthermore, the employer may be eligible for a deduction if the
expenses are deemed ordinary and necessary according to section 162(a).
When traveling for business, it is important to keep track of your expenses. Under Section
162(a)(2), you can deduct travel expenses for food and lodging. However, there are
limitations under Section 274. To qualify for the deduction, the expense must be necessary
and ordinary, not lavish, or extravagant. You or your employee must have been in attendance
when the food or beverages were presented, and they must be provided to a current or
prospective business customer, client, consultant, or similar business contact. Additionally,
the food and beverages must be purchased separately from any entertainment activity, and
you should keep documentation such as bills, receipts, or invoices. Following these guidelines
can help you maximize your deductions while staying within the rules.
To claim deductions during the taxable year, it is essential that the expenses incurred are
necessary and ordinary and have already been paid. Section 212 provides two ways in which
these deductions can be made. Firstly, under Section 212(1), expenses can be deducted if they
were incurred for the purpose of producing or collecting income. Secondly, under Section
212(3), deductions can be made in relation to the determination, collection, or refund of any
tax.
It's worth noting that employees could be exempt from paying taxes on per diem rates.
However, it's important to remember that for these payments to be tax-free, they must be
within the federal per diem rate. To find out what this rate is, you can refer to publication
1542 because it depends on where the business trip is for the correct rate in the area, they will
be in. If payments exceed this rate, they will be classified as taxable. In addition to this,
employees must provide evidence of their expenses by submitting an expense report under
section 274(d). This report should include details such as business purpose, destination, dates
and times of the trip, and the total expense amount.
Employees are required to submit an expense report within 60 days or less to avoid any
potential tax implications. It is important to stay on top of this task to ensure timely and
accurate payment processing.
I find the entertainment component of meals/entertainment to be perplexing. Previously, there
was a 50% deduction for entertaining a prospective client. Regrettably, the TCJA eliminated
this advantage, and entertainment expenses can no longer be deducted. Something else that
could be confusing is the different per diem rates.
I recommend that the client maintains thorough records and receipts, providing as much detail
as possible. It is crucial that they become familiar with per diem regulations and seek
guidance should any questions arise. Tax laws are subject to change, and failing to comply
can lead to unwanted consequences. For instance, entertainment expenses are no longer
permitted under the Tax Cuts and Jobs Act of 2017. The per diem rate can be perplexing, so it
is essential to decide whether to include lodging and meals or solely meals and remain
consistent.
Corporations can use a per diem rate to cover their employees expected meals lodging in
contract to corporations reimbursing the actual expensing § 162. b The corporation can deduct
per diem amounts however there is a lot of confusion in what and how much can be deducted.
If a company chooses to combine their deduction for Meals and lodging, they will there need
to have substantial proof § 1.274-5(c)(2)(iii). b The proof needed would include receipts, paid
bills, or any other evidence to support the expense. Whereas if they claimed them separately
then meals under § 274(n) would be deducted by 50% and lodging would be deducted at
100%.
If the corporation pays more than the federal per diem rate then the employee is taxed on the
excess amount. Also, if the employee does not submit proper substantiated proof, then the
employee may be taxed on the entire amount.
I would advise my client to ensure the employees that are traveling have a good
understanding of all required documents needed to submit. Also ensuring that my client
understands which per diem method they choose and to ensure they stay consistent with the
method.
A per diem is an allowance a business provides to traveling employees for lodging, meals,
and other travel expenses when such expenses are directly related to conducting business.
Travel expenses are generally deductible business expenses per section 162(a)(2). The
deductibility of these expenses is one area that can easily be misunderstood. Most are 100%
tax deductible, however only 50 percent of meal expenses are allowed to be deducted (section
274(n)1). Section 274(d) specifies that substantiation is required in order to deduct travel
expenses at all. Further, Tres. Reg. § 1.274-2(a) completely disallows the deduction of
entertainment expenses. Because it was previously (prior to 2018) 50% deductible treated the
same as meals, this is a perfect example of the type of tax change and update that tax
professionals need to assist businesses in understanding. If a business does not keep
themselves informed or have a trustworthy tax source to assist them, they may inadvertently
continue to claim expenses that they deducted in prior years. The taxability of per diem
allowances is another area where careful observance of code and regulations is needed to
ensure compliance. Understanding the taxability is critical for ensuring payroll taxes and
employees’ W2 taxable wages are correct. When the amount of per diem allowance exceeds
the actual substantiated expenses of the employee, if the employee fails to (or is not required
to) return the excess, that excess amount is subject to payroll taxes. In other words, any part of
the allowance the employee receives that cannot substantiated with receipts becomes taxable
income if they do not return it to the employer (Treas. Reg. § 1.62-2(h)). Per diem is an
allowance paid to employees for lodging, meals, and incidental expenses incurred when
traveling. Per diem payments are not considered wages and are therefore non-taxable if they
meet certain conditions. Travel meal expenses can be figured out using one of two methods. If
the actual cost method is used, then records of the actual costs must be kept. If the standard
meal allowance method is used, then federal meals and incidental expense per diem rates are
applied according to travel location and time. Ordinary and necessary business expenses are
usually tax deductible. However, there are rules and limitations on meal expenses. Under sec.
274(n), only 50 percent of non-entertainment meal expenses can be deducted. Under sec.
274(a)1, if the meal is considered a gift or used for entertainment by itself when it is provided
for a client or customer, then a deduction is disallowed. In the 2023 case Joseph Amundsen v.
IRS, the petitioner’s tax diary failed to substantiate the requirements of section 274(d). The
diary was vague and did not list the time, place, and business purpose of business travel. The
petitioner failed to meet the threshold requirements of Tres. Reg. 1.274-5T(b). Therefore, the
petitioner was not entitled to a per diem amount for travel and meal expenses.
Per diem payments are taxable to the employee when no expense report is filed with the
employer or if the report is filed but does not include pertinent information. In addition, a flat
amount is given to the employee and no expense report is required or per diem is paid more
than the allowable standard federal rate. Under these circumstances, the per diem payments
would be treated as wages and employment taxes are due from the employer.
Clients should be advised to keep a detailed tax diary of all travel expenses. Just in case of an
audit. In addition, a client should be advised of the federal per diem rates. Even if an expense
report is not due to the employer, the records may be submitted or needed after an audit.
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