OK – We’ll admit the above headline could be misunderstood. Whereas there are no “given” or guaranteed deduction amounts without the proper records, there are some IRS-approved methods that will make your record keeping much easier than ever before.
Per-diem amounts are fixed dollar amounts that IRS will accept for daily travel, meals, and incidental expenses as we explain below. I’ve kept the concept simple for purposes of this post, so check with us before you change any of your recordkeeping procedures.
Business travelers have a lot of expenses to keep up with from hotels to taxis to dining. Rather than tracking every piece of paper in this process, the Internal Revenue Service (IRS) allows the use of per diem (Latin meaning “for each day”) rates.
Here’s how it typically works: a per diem rate can be used by an employer to reimburse employees for combined lodging and meal costs, or for meal costs alone. Those per diem payments are not considered part of the employee’s wages for tax purposes so long as the payments are equal to or less than the federal per diem rate and the employee provides an expense report. If the employee doesn’t provide a complete expense report, payments will be taxable to the employee. Similarly, any payments in excess of the per diem rate will also be taxable.
Travel expenses are deductible to the extent they are considered business expenses, meaning they are ordinary and necessary expenses of traveling away from home for your business, profession, or job. You are considered to be traveling away from home if you are required to be away from your tax home for a period substantially longer than an ordinary day’s work, and you need to get sleep or rest to meet the demands of your work while away. Remember that you can’t deduct expenses eligible for reimbursement under an employer accountable plan – even if you didn’t claim the reimbursement. However, if your actual expenses exceed the per diem rate, you may itemize your deductions on your return to deduct the excess.
It’s worth noting that transportation between where you sleep or work and where you eat, as well as the mailing cost of filing travel vouchers and paying employer-sponsored charge-card billings, are no longer included in incidental expenses. If you want to snag a break for those, and you use the per diem rates, you may separately deduct those on your tax return or request that your employer reimburse you.
When it comes to self-employed persons, the per diem rates aren’t as useful: they can only use per diem for the meal costs (that means that you must otherwise keep excellent records and use exact numbers).
Business travelers who incur expenses while traveling away from home have new per-diem rates to use in substantiating certain of those expenses, starting Oct. 1.
The updated rates are effective for per-diem allowances paid to any employee on or after Oct. 1, 2016, for travel away from home on or after that date, and supersede the prior rates published at this time last year.
Let’s quickly recap the categories that these per-diem amounts cover.
Since 2012, incidental expenses have included only fees and tips given to porters, baggage carriers, hotel staff, and staff on ships. The per-diem rate for the incidental-expenses-only deduction remains unchanged at $5 per day for any locality of travel.
The special meals and incidental expense rates for taxpayers in the transportation industry are $63 for any locality of travel in the continental United States and $68 for any locality of travel outside the continental United States, unchanged from last year.
High-low substantiation method
For purposes of the high-low substantiation method, the per-diem rates are $282 for travel to any high-cost locality and $189 for travel to any other locality within the continental United States, slightly higher than last year.
The amount of these rates that is treated as paid for meals for purposes of Sec. 274(n) is $68 for travel to a high-cost locality and $57 for travel to any other locality within the continental United States, unchanged from last year.
The notice published below contains a list of the localities that are high-cost localities (localities that have a federal per-diem rate of $236 or more) for all or part of the calendar year.
|As of October 1, 2016, the special meals and incidental expenses (M&IE) per diem rates for taxpayers in the transportation industry are $63 for any locality of travel in the continental United States and $68 for any locality of travel outside the continental United States. The per diem rate for meals & incidental expenses (M&IE) includes all meals, room service, laundry, dry cleaning, and pressing of clothing, and fees and tips for persons who provide services, such as food servers and luggage handlers.
The rate for incidental expenses only is $5 per day. Incidental expenses include fees and tips paid at lodging, including porters and hotel staff.
Since the cost of travel can vary depending on where – and when – you’re going, there are special rates for certain destinations. For purposes of the high-low substantiation method, the per diem rates are $282 for travel to any high-cost locality and $189 for travel to any other locality within the continental United States. The meals only per diem for travel to those destinations is $68 for travel to a high-cost locality and $57 for travel to any other locality within the continental United States.
You can find the entire list in the original IRS notice 2016-58 below (downloads as a pdf).
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