Per Diem
Sometimes businesses require their employees to travel away from home. A per diem is an
allowance that businesses provide to their employees to reduce the financial burden of
traveling. Per diems can be used to cover the employee’s meals and incidental expenses, as
well as lodging.
Two main questions exist when using per diem allowances: 1) are they deductible, and 2) are
they includable in the employee’s wages.
Tax Law Analysis: Per Diem
1. Deductibility
Section 162(a)(2) allows a business to deduct ordinary and necessary expenses
(including lodging and meals that are not lavish) in conjunction with traveling away
from home in the pursuit of a trade or business. Section 274(d) provides that to be
deductible, taxpayers must substantiate the expenses by maintaining records that
include:
A. The amount of the expense
B. The time and place of travel
C. The business purpose of the expense, and
D. The relationship between the taxpayer and the person receiving the benefit
Alternatively, employers can use the federal per diem rates in Publication 1542 for
travel within the continental US.
Note that section 274(n) limits the deductibility of the portion of per diems related to
meals to 50%.
2. Inclusion in wages
If the amount of per diems paid to an employee do not exceed the amount of that the
employee substantiated (or the federal published rate if using that method), under
Treas. Reg. section 1.62-2(h) the per diem allowance is not includable in the
employees’ wages.
Meals & Entertainment
Meals and entertainment expense deductions are areas that lead to a lot of confusion. In fact,
the IRS published Notice 2018-76 to provide additional guidance to taxpayers after the recent
tax law changes. Adding additional complications are temporary exceptions due to the COVID-
19 pandemic.
When it comes to meals & entertainment, the main issue is how much is deductible.
Analysis: Entertainment
As part of the Tax Cuts and Jobs Act of 2017 (TCJA), section 274 now disallows entertainment
expenses. Prior to TCJA businesses were allowed to deduct 50% of their entertainment
expenses that were in connection with a business purpose. However, notice 2018-76 clarifies
that businesses may deduct 50% of the cost of food and beverage provided during such
entertainment activity so long as it is purchased separately or stated separately on the bill,
invoice or receipt.
Analysis: Meals
The deduction for most business meals remains at 50% under section 274(n). However, there
are certain circumstances when meals are 100% deductible. b Section 274(n)(2) lists exceptions
from the 50% limitation. Some of the most common include:
1. When the expenses are treated as compensation as discussed in section
274(e)(2) or includable in the employee’s wages as described in section
274(n)(2)(B)
2. Under section 274(n)(2)(D), for food and beverage provided by a restaurant
that were paid or incurred before January 1, 2023. b This was a temporary tax
law change to help restaurants which were impacted by the COVID-19
pandemic.
Conclusion b
As will all deductions, taxpayers must continue to maintain the required substantiation.
Additionally, tax laws changes happen frequently so it is important that tax advisors and their
clients communicate often. b Tax advisors should follow up with their clients to explain tax law
changes that might impact them. Clients/taxpayers should seek the guidance of their tax
advisor whenever making any changes to their policies or procedures, or when contemplating
material transactions.
