Per diem tax deductions for working out-of-town

Written by cheri dohnal
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Per diem tax deductions for working out-of-town
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Many employees receive per diem travel allowances or reimbursements for travelling on company business, but that is only one example of the per diem transactions available to both employees and self-employed individuals. To know when it will benefit you most to use per diem as a travel tool, you'll need to understand how it is regarded by IRS.

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Employee vs. Self-Employed

A W-2 employee may claim per diem travel expenses on his taxes for unreimbursed food and lodging any time he travels out of town. The only catch is that he must use itemised deductions rather than the Standard Deduction. All travel expenses for employees are claimed on Form 2106, which transfers the totals to the "miscellaneous" section of Schedule A (Itemized Deductions). Self-employed individuals may only use per diem travel deductions for meals -- not for lodging -- and they are deducted on Schedule C (Profit or Loss on Business).

Methods & Rates

Choose a rate method and stick with it. Employers wishing to use per diem to pay for employee travel are required to choose a single rate method for all employees to use during the entire year. You may choose between the standard rate and the high/low rates, but all employees must be on the same reimbursement plan. For simplicity, most employers choose the high/low rate method because it applies a single daily rate to all locations within the continental U.S. The standard method provides a much more realistic rate allowance for high-cost areas, but the employer has to look up each city's rate in a table to know how much to allow.

Accountable Plans

Ask your employer if it is an "accountable plan." Not having an accountable plan for travel allowances and reimbursements will have major tax implications for employees. To qualify, the system used must require a specific level of accountability from the employee, such as returning excess advances and providing receipts. An employer using an accountable plan should not report any advances or reimbursements as income on the employee's W-2 form. If they are not reported as income, the employee will not need to claim the expenses on his tax return. Any travel expenses reported as income should be deducted as an itemised deduction as explained earlier.

Departure and Arrival Days

Establish a percentage for partial days. Per diem rates are based on an amount for lodging and another for meals, incidentals and entertainment (MI&E) for a 24-hour day. Since departure and arrival days consist of less than 24 hours' absence, IRS expects the MI&E amount to be prorated on those days. Use any reasonable method to prorate partial days, but you must be consistent in using that method. For example, you may choose to allow 50 per cent or 66 per cent of a full day's MI&E rate, but you must use that same 50 or 66 per cent for every departure and arrival day for every employee throughout the year.

Self-Employment Rules

Be consistent with your travel deductions. Although you are allowed to use per diem payments for all employee travel, you may only use per diem to deduct the MI&E portion of your own business travel. Deduct the actual cost of lodging and keep the receipts as proof. Use whichever per diem method (standard or high/low) you use for employee travel, but apply it only to the MI&E portion of your own travel. All other rules are the same as they are for employees.

Foreign and OCONUS

All of the information prior to this paragraph pertains to travel within the continental U.S. (CONUS). Travel to foreign destinations and those outside the continental U.S. (OCONUS) requires the use of separate per diem rate tables for each location. All other principles remain the same. Allowances for foreign and OCONUS travel are generally higher than for CONUS travel.

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