Per diems are provided to employees to reimburse them for meals, lodging, and incidental
expenses when traveling for business activity. Businesses can either elect to use a standard
per diem rate determined by the IRS or use actual costs. Both require documentation;
however, the actual costs require receipts to be included to substantiate the reimbursements
while the standard per diem requires a log of the destination, date(s), and business purpose.
The standard rate for meals and incidental expenses (M&IE) is a flat rate per day regardless of
how much was spent. For example, the daily per diem for M&IE for Florida (without
locations without specified rates) is $59, if the employee spends $80 on M&IE during that
day, the most they will be reimbursed for is the standard rate of $59, the amount above and
beyond that is on the employee.
Businesses are only allowed to deduct 50% of business meals, with an exception for 2021
and 2022. For the calendar years of 2021 and 2022, if the business meals are provided by a
restaurant, they are fully deductible; if they are not provided by a restaurant, though, they are
still subject to the 50% limit. The TCJA of 2017 disallowed any deductions for
entertainment, for example tickets to a football game. b
Per diem paid to employees are generally excluded from the employee’s gross income, with a
couple of exceptions. b If the per diem paid to the employee is in excess of the federal rate, the
excess amount would be considered compensation to the employee and subject to federal and
employment taxation (FICA and Medicare tax). Also, if the per diem is not substantiated, it
would be treated as compensation. For example, if the employee takes a trip to attend a
business conference but does not provide the dairy/log of the date, destination, and business
purpose, that would not be substantiated and any per diem paid to the employee would be
considered taxable.
The advice I would give to a client regarding per diem is to first choose how they want to do
the per diem, standard rate or actual. This should be included in the personnel policy
outlining the policies and procedures of the business. Proper documentation retention should
be prioritized for per diem to be paid; in the event of an audit, all the documentation will be
needed to substantiate the deduction for the business. If traveling is common practice,
regularly checking the GSA website for the proper per diem rates for M&IE and lodging
should be completed to ensure that they per diem is being paid accurately for the location of
the travel. Businesses should ensure that they properly deduct lodging, which is 100%
deductible, and meals, which are 50% deductible, these should not be grouped together. Per
diems are used commonly in the world for business purposes. Although they are extremely
helpful when it comes to business expenses and the tax side of things, a business must always
be extremely accurate when recording things that they would like to be consider per diems.
There are many businesses expenses such as travel and stay that are per diems but things like
entertainment are not. When it comes to clarifying your business expenses you must make
sure you categorize them because if you were to put meals and entertainment into one
category the meals would not be considered for per diem. This is because since meals and
entertainment are in the same category there is not real way of determining what amount of
money was spent on meals and what amount was spent on entertainment. When it comes to
per diem you must always keep up with its rules and regulations. Since per diem can be
altered or changed over time you want to make sure that you know exactly what can be
written off as a per diem. Notice 2021-63 makes it clear what is considered a business
expense under per diem. For taxpayers these procedures that regard to per diem come from
Procedure 2019-48
"Per diem" comes from Latin meaning "by the day." In business, per diem refers to a daily
allowance to cover (or offset) the costs associated with business travel. These travel expenses
include transportation, lodging, shipping necessary business materials (displays, samples),
meals, tips, and other business-related incidentals. (IRS Topic 511).
Business travel expenses can be paid or reimbursed directly for the actual cost of the travel, or
the per diem allowance can be used. Both methods have record-keeping requirements, but the
per diem record requirements are simply to report the dates and purpose of the business travel
(FAQ). Oftentimes, the per diem rate is less than the actual costs of the travel and an employer
providing a per diem allowance instead of full reimbursement can save money on travel
expenses. Prior to the Tax Cuts and Jobs Act in 2017, employees could itemize the
unreimbursed amounts of business travel expenses to reduce their taxable income. Many
taxpayers are surprised by record keeping requirements of per diem payments. Additionally,
employees that previously itemized these expenses are disappointed to learn that is no longer
allowed.
IRC Section 274 (n) allows business related meals to be deductible at 50% of actual costs.
This section was amended by the Tax Cuts and Jobs Act in 2017 to disallow entertainment
expenses. Meals are still deductible, at the 50% rate. The Taxpayer Certainty and Disaster
Relief Act of 2020 suspended the 50% limitation and allowed for meals to be deducted at
100% of costs. IRS issued Notice 2021-25 with specific guidance.
From my experience communicating with taxpayers, many do not realize the limitations for
business meal deductions and the disallowance of entertainment expenses. In Central Florida,
we have a long history of business owners "entertaining" clients with sporting event tickets,
rounds of golf, and visiting theme parks. It’s generally easy to inform clients that meals are
limited to 50%, but not a week goes by that I have to tell a client that paying for Tampa Bay
Buccaneer tickets is NOT a business expense, and will be reclassified as a personal draw in
the accounting record.
Per diem is an allowance paid to employees for lodging, meals and incidental expenses
incurred when the employee is traveling. The payment is in lieu of paying for their actual
travel expenses. Per diem payments are not considered wages and are not taxable if they meet
certain conditions. They will be subject to taxes if any of the following are true:
Payment is more than the allowable federal per diem rate
You did not file an expense report with your employer
Your expense report did not include the date, time, place, amount, and business purpose of the
expense
Your employer gave you a per diem and did not require an expense report
Per diems for travel would be allowed a full deduction for the expenses reported. Under
section 162(a) traveling expenses are allowed as a deduction for a trade or business. However,
only fifty percent of meals expense is allowed as a deduction, if it is not lavish in nature
(Section 274(n)). Both can be used for corporations who give per diem to employees. There is
a temporary rule under notice 2021-25 for meal expenses paid or incurred after December 31,
2020 and before January 1, 2023, the meals expense is fully deductible. All meal expenses
paid or incurred after January 1, 2023 will be limited to fifty percent deductible.
Entertainment on the other hand is not deductible for the corporation. The IRS does not allow
deductions for activities which are entertainment, amusement, or recreation (Section 274(a)).
However, food or beverages purchased at an entertainment activity is deductible under the
same rules as meals when they are separately purchased from the entertainment.
In advising a client on per diems involving travel, meals, and entertainment I would stress the
difference in how the deductions are handle. I would recommend for the client to keep
separate accounts when they are recording their financials. This would allow them to see most
easily what they could be getting for a tax deduction. I believe it would also allow them to
keep better track of how per diems are being spent by employees. I would also keep them up
to date with the changes in meals due to the temporary allowance of the full deduction.
Section 162
Section 274
Notice 2021-25 "Temporary 100-Percent Deduction for Business Meal Expenses"
Phyllis Montgomery
Internal Revenue Code Section 274 - Disallowance of certain entertainment, etc expenses.
Internal Revenue Code Section 1.162-2 - Traveling expenses.
IRS Topic 511 - Business Travel Expenses.
IRS Notice 2021-25 - Temporary 100 Percent Deduction for Business Meal Expenses.
IRS Notice 2021-63 - Temporary 100 Percent Deduction for Business Meal Expenses as
applies to Per Diem Allowance.
IRS Revenue Procedure 2019-48 - Updates to per diem guidance for business travellers.
IRS Per Diem FAQ. https://www.irs.gov/pub/irs-regs/perdiemfaq%26a.prn.pdf
IRS provides guidance on per diem rates and the temporary 100% deduction for food or
beverages from restaurants | Internal Revenue Service. (n.d.). Www.irs.gov.
https://www.irs.gov/newsroom/irs-provides-guidance-on-per-diem-rates-and-the-temporary-
100-percent-deduction-for-food-or-beverages-from-restaurants
U.S. General Services Administration. FY 2023 Per Diem Rates for Florida.
https://www.gsa.gov/travel/plan-book/per-diem-rates/per-diem-rates-
results?action=perdiems_report&fiscal_year=2023&state=FL&city=&zip=
