In the corporate world, per diems, often called daily allowances, which are frequently utilized
to reimburse employees for their travel-related business expenses. They are made to make it
easier to keep track of and reimburse staff members for expenses incurred while on business
trips, notably for meals and other incidentals. To maximize tax relief and maintain
compliance, it is essential to comprehend the per diem tax implications and related rules
(County, 2020).
The substantiation requirement is one element of the regulations that could be misinterpreted.
To claim a per diem reimbursement as a non-taxable expense, the IRS asks employees to
verify their costs (Samb et al., 2020). This often entails keeping track of documents like
receipts, vacation plans, and expenditure reports. If the substantiation requirements are not
met, the per diem may be considered as taxable income. Hence, it is crucial for employees to
understand the documentation required to keep accurate records and support them per deim
claims. The distinction between meal and entertainment expenses is another thing that could
be misconstrued. While meals are covered by per diems, there are greater restrictions on
entertainment costs. Most entertainment expenses, such as tickets to athletic events, concerts,
and other comparable entertainment activities, are no longer deductible under the Tax Cuts
and Jobs Act of 2017 (Roin, 2019). However, subject to some restrictions, meal expenses for
business purposes are still tax deductible. To follow the rules, it is essential for employees to
grasp the difference and make sure they correctly divide their spending between meals and
entertainment.
It is recommended to follow the given actions to help the client understand the guidelines for
per diems and meal/entertainment expenses. Provide the client with instructional materials,
conferences, or training courses that outline the IRS regulations regarding the substantiation
needs, per diems, and the distinction between entertainment expenses and meals. Moreover, it
is essential to communicate clearly the rules and requirements to employees through internal
communication like email updates, newsletters, or dedicated information sessions. Review
the client's existing procedures and policies related to expense reporting, per diem
reimbursement, and documentation requirements (Samb et al., 2020). Further, regularly
monitor and review the compliance of employees with expense reporting policies and the per
diem.
Following these steps, the client can understand that their employees are clear about the rules
and regulations regarding meals or entertainment expenses and per diem. It can help them to
minimize the potential tax issues and the risk of non-compliance while maximizing the
available tax relief.
Per diem payments are issued by a company to their employees while traveling on company
business. Generally, the employee would receive a daily amount to cover meals and
entertainment expenses. Anything over and above the allowable rates per day would need to
be paid out of pocket by the employee.
Substantiation is required in order to claim a deduction for travel expenses. Items necessary
for the deduction would include the date, amount, place of travel, and the reason. It must be
carried out during the normal course of business. 26 U.S. Code § 274(d)(3).
Deductions for expenses attributable to travel, entertainment, gifts, and the use of “listed
property”, if otherwise allowable, are subject to strict rules of substantiation. § 274(d);
Sanford v. Commissioner, 50 T.C. 823, 827 (1968), aff’d per curiam, 412 F.2d 201 (2d Cir.
1969); Temp. Treas. Reg. § 1.274-5T(a).
Entertainment and gifts are the most confusing. The entertainment can be deducted if it is not
considered lavish or extravagant, and that may be open for interpretation. Business owners
may be able to deduct the costs of meals and beverages provided during an entertainment
event if either of these apply:
the purchase of the food and beverages occurs separately from the entertainment
the cost of the food and beverages is separate from the cost of the entertainment on one or
more bills, invoices, or receipts. (IRS, pub 463).
In talking with your client, you need to be clear about the IRS rules. I would give my
interpretation of the rules in layman’s terms to my client. For meals and entertainment
expenses, you need to always be cautious and conservative. If they have a question about a
specific deduction, I would ask they call me to ask for assistance in determining the deduction.
County, G. GREENVILLE COUNTY ALUMINUM LIVE FLOOR TRANSFER TRAILERS
RFP# 64-02/26/20.
Roin, J. (2019). The Case for (and Against) Surrogate Taxation. Va. Tax Rev., 39, 239.
Samb, O. M., Essombe, C., & Ridde, V. (2020). Meeting the challenges posed by per diem in
development projects in southern countries: a scoping review. Globalization and health,
16(1), 1-11.
