Deductibility & Taxability of Per Diem Allowance
Author: Shana Fick
An understanding of current U.S. per diem rates could help taxpayers realize previously unrecognized tax benefits and reduce the potential for tax issues. The U.S. General Services Administration provides guidance to employers on the amount to reimburse employees for lodging, meals and incidental expenses incurred when traveling, in lieu of paying definite travel expenses.
Deductibility – How employers deduct a business expense under a reimbursement or allowance arrangement depends on whether the employers have an accountable or nonaccountable plan. An accountable plan requires employees to submit a report to the employer, including the business purpose of the trip, date, location and receipts.
If an accountable plan is implemented, the employer should deduct the payment as lodging, meals or entertainment expenses (discussed below). A nonaccountable plan requires the reimbursement of expenses to be reported as wages on Form W-2 and deducted by the employer as wages on the appropriate line of the tax return.
Taxes – The amount you can deduct for tax purposes may be less than the deduction on the books. The Internal Revenue Code allows only 50 percent of the amount paid for meals and entertainment (M&E); lodging expenses are fully deductible. Under an accountable plan, the company must treat 40 percent of the per diem as meals and incidentals, meaning 20 percent of the employer-paid per diem deemed to be M&E is nondeductible.
Industry Standard – Employers in certain industries are unable to avoid per diem payments. The need for specialized workers in various job locations requires employers to bring in outside labor. This travel requirement could cause per diem expenses to be a significant portion of the overall costs of some projects.
Recordkeeping Requirements – It’s important to maintain records to substantiate food and beverage expenses. The use of a per diem reimbursement allowance lets employers easily maintain the evidence required by the IRS since no receipts are necessary.
Notes for Employees
Nontaxable – The per diem allowance isn’t included with employee wages if the payment is equal to or less than the federal per diem rate and the employer receives an expense report from the employee. Again, the report must include the business purpose of the trip, date and location.
Taxable – Per diem allowances are taxable to an employee when no expense report is filed with the employer or the report doesn’t include all of the facts listed above. Allowances also are taxable if an arbitrary amount is given without reporting requirements or the allowance is in excess of the allowable standard federal rates. However, taxable employee allowances permit a Schedule A (Form 1040) deduction for unreimbursed employee business expenses.
For more information regarding the per diem allowance, contact your BKD advisor.