A taxpayer may use a per diem method of substantiation in lieu of accounting for and deducting the actual amount of travel costs. The IRS provides the rules regarding the per diem substantiation method and reimbursements. Per diems can be used to substantiate travel cost; the time, place, and business purpose must still be substantiated through adequate documentation.
Who can use per diem method of substantiation?
The per diem method is available to (1) employers for use with an employee reimbursement plan, (2) employees not covered by an accountable or other expense allowance arrangement, and (3) self-employed individuals. Self-employed individuals can use the optional per diem method only for deducting meals and incidental expenses.
When can an employer use a per diem allowance to reimburse employees for business travel expenses?
An employer can use a per diem allowance to reimburse employees for business travel expenses incurred while away from home. The per diem amount can be at or below the applicable federal per diem rate, a flat rate or stated schedule, or in accordance with an IRS-specified rate or schedule. The amount deemed substantiated for each calendar day (or partial day) is the lesser of the per diem allowance or the amount computed at the federal per diem rate for the locality of travel.
Documentation required by IRS for Per Diem Expense Method
Although per diem allowance plans eliminate the need for employees to gather documentation supporting the actual amount spent while traveling on company business, employees must still substantiate the other elements of the travel-related expenses (i.e., time, place, and business purpose) before the allowance can be treated as made under an accountable plan. If the expense allowance arrangement routinely results in payments of excess allowances that are not repaid or treated as wages, the entire plan will be treated as an unaccountable plan, and 100% of the per diems (not just the amount in excess of the federal rate) will be treated as employee compensation subject to employment tax.
Receipts are not required to prove the amounts of travel expenses when using the per diem method
While receipts are not required to prove the amounts of travel expenses when using the per diem method, employees may find it convenient to submit lodging receipts (these generally conclusively prove the dates and place of the travel) on which the employee has stated the business purpose for the travel. A lodging receipt can be an easy way for employees to meet the remaining documentation requirements. An airline ticket is another convenient source document that provides most of the needed information.
How to Calculate Travel Allowance
A travel allowance that is computed on a basis similar to that used in computing the employee’s compensation (e.g., hours worked, miles traveled, or pieces produced) is not a per diem allowance unless, as of December 12, 1989, (1) the allowance was identified by the payor either by making a separate payment or by specifically identifying the amount of the allowance, or (2) an allowance computed on that basis was commonly used in the industry in which the employee is employed.
Per Diem Business Travel Expenses
A taxpayer may alternate during a tax year between using the per diem method (except for the shortcut high/low method mentioned later in this key issue and except for a special rule for transportation industry workers) of substantiation and substantiation of actual amount of travel costs. A taxpayer may alternate as frequently as daily between methods.
Maximum per diem amounts for business travel
The maximum per diem amounts that are deemed substantiated under the IRS guidelines are those that apply to federal employees. There are two separate rates for each locality: a rate for lodging and a rate for meals and incidental expenses (M&IE). The government issues separate tables for the following travel locations: (1) continental U.S. (CONUS) and (2) nonforeign locations outside the continental U.S. (Non-contiguous), which includes Alaska, Hawaii, and U.S. possessions, and foreign locations (OCONUS). The CONUS rates are updated October 1 of each year (although there may be occasional updates during the year) while the Non-contiguous and OCONUS rates are normally updated each month. The rates can be found at the government’s General Services Administration website at www.gsa.gov/perdiem.
CONUS lodging and M&IE rates
Because the update cycle for the CONUS rates occurs during the calendar year (October 1), the IRS allows taxpayers to use the old rates for the entire calendar year. Thus, for 2012, taxpayers can use the rates in effect for January through September for the entire year or switch to the updated rates beginning October 1.The CONUS lodging and M&IE rates vary depending on location. (See the previously mentioned website for the per diem amounts for specific locations.) Employers have the option of using a simplified per diem method known as the high/low method, which use only two sets of per diem rates—one for designated high-cost localities and another for all other localities. (This method is not available to self-employed taxpayers or unreimbursed employees.