Companies use per diems to reimburse their employees for expenses incurred during business
travel. Section 274(a) does not allow a deduction for an activity that is entertainment,
amusement, or recreation. Section 274(d) states that a deduction under section 162 or 212 for
any traveling expenses including meals and lodging are only allowed if the substantiation
requirements are met. These requirements state that you must have adequate records such as
receipts, have the amount of the expense, the time and place of travel, and the business
purpose of the expense. Section 162 allows a business to deduct ordinary and necessary
expenses such as lodging and meals while traveling for business purposes. Lodging is 100%
deductible while under section 274(n) meals are only 50% deductible.
I would advise a client to keep receipts from their employees or a detailed expense sheet
tracking all lodging, meals, and transportation. It is important that the client understands to
keep lodging and meals separate and not lump them together as meals are only 50%
deductible.
In general, expenses that are ordinary and necessary, incurred during the tax year, in carrying
on any business or trade are allowed to be deducted under Sec. 162(a). This includes traveling
expenses; however, Sec. 274(n) generally limits the allowable deduction for meal expenses to
50 percent. Per diem, or “per day”, is an allowance given to employees to cover travel
expenses, specifically lodging, meals, and incidentals. Employers can pay this instead of
reimbursing actual travel costs. (Reg § 1.274-5(g)) Employers may choose to do this in lieu of
actual expenses for several reasons such as saving time and money. Per diems can often be
less than the actual cost thus saving money and keeping employee spending in check. Using a
fixed daily amount can also help companies budget better. Another reason may be because the
substantiation requirements are simpler, which can save time and money on administrative
tasks of record keeping.
Per Sec. 274(d) the deduction is disallowed “unless the taxpayer substantiates by adequate
records or by sufficient evidence corroborating the taxpayer’s own statement (A) the amount
of such expense or other item, (B) the time and place of the travel or the date and description
of the gift, (C) the business purpose of the expense or other item, and (D) the business
relationship to the taxpayer of the person receiving the benefit.” This section also disallows
the deduction for activities considered to constitute entertainment, amusement, or recreation.
Additionally, it includes that the “Secretary may by regulations provide that some or all of the
requirements of the preceding sentence shall not apply in the case of an expense which does
not exceed an amount prescribed pursuant to such regulations.” Tres. Reg 1.274-5(g)
authorizes the Commissioner to prescribe rules in pronouncements that allows expenses in
accordance with reasonable business practice to be regarded as equivalent to substantiation by
adequate records or other sufficient evidence; amounts must be the lesser of the perdiem
allowance or the appropriate IRS-approved maximums and the employee must satisfying the
requirements of an adequate accounting to the employer (time, place, and business purpose)
(Rev. Proc. 2019-48, 2019-51 IRB 274).
Sec. 162
Sec 274
Tres Reg 1.274-5
Rev. Proc. 2019-48, 2019-51 IRB 274 b
