Using Per Diems


Today TaxMama® hears from Raj in the TaxQuips Forum, with a common issue. Let me summarize. (You can read the discussion here ) His tax return is being audited and the IRS auditor wants copies of receipts for his hotel stays for all his travel. But he used the IRS per diem rates, so he didn’t keep receipts. Can she disallow all his travel if he can’t produce the receipts?

                                                                    

Dear Raj,

The IRS allows you to use certain standardized systems to deduct business expenses – like mileage, travel, meals and, this year, even office in home. This is designed to simplify computations, and perhaps, to reduce incidences of audits.

However, in all cases, you still need records, receipts, etc. –  proofs that you did engage in those activities, did spend money on those things, etc. So, when you’re using per diem lodging expenses, you still have to have receipts or some other tangible proof that you actually stayed in those towns for those specific nights.

Self-employed people can’t use per diem rates for lodging. They must use actual expenses – and keep receipts.

However, everyone may use per diem rates for meals and incidentals. Again, it helps if you have records to prove you were in a specific town, on a specific date, for business purposes.

If you are an employee, entitled to use lodging per diems, often, when you stay in an area long-term, you stay with your parents, a friend, or relatives, rather than a hotel. Be sure to pay rent, or your share of upkeep on the home. Get detailed receipts for your rent or the payments. The receipts should show the date, the amount paid, and to whom the amount was paid – and for what. When you are paying rent to such folks, be sure they understand that they are reporting the rental income.

When you keep good records and have receipts, you can find yourself paying someone $500 a month for a room. However, you could be entitled to deduct $2,310/mo ($77 x 30 – average rates in the continental US) – or even as much as $8,850/mo ($295 x 30 in Manhattan), if you look up your city’s specific rate.

And remember, you can find answers to all kinds of questions about substantiating travel expenses and other tax and business issues, free. Where? Where else? At www.TaxMama.com.

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11 thoughts on “Using Per Diems

  1. JSH says:

    Can an employer take a deduction for per diem on their corporate return if they only paid the actual amount? For example they pay $50 hotel room on books they debit distributions and credit cash as well as debit travel expense $141 (per diem) and credit distributions.

  2. TaxMama says:

    Dear Kristen,

    If you think your withholding is too high, you can use Form W-4 to change your withholding.
    I urge you to sit down with a tax pro to do a projection of your expected tax liability for 2013. From what you tell me, your income has increased – and your taxes will increase along with that as you get into a higher tax bracket. So you refund may not be higher.

    There are calculation tools you can use online, like Turbo Tax’s Tax Caster. But it won’t do as good a job as you need. Please spend an hour with a tax pro and, perhaps get some additional advice on how to reduce your taxes, as well.

    Good luck!

    Hugs
    Eva

  3. Kristin Boyd says:

    Hello,

    I graduated college about a year ago. From the time I graduated, I was loaded down with debt as well is two unforeseen financial situations. I wanted to know if I could reduce the amount of money I currently pay in income taxes. I am a teacher and pay income taxes before I receive my check. I had no withholdings last year. I worked part time during the summer and started in August, getting paid in September? I received $1000 in my return for last year. I expect to receive much more than that because I am working then entire year instead of half the year. I also make about twice what I used to make at my part time job. Should I decrease what I pay in taxes? If so, by how much? And how should I go about doing this?

  4. TaxMama says:

    Hi Kelly,

    If it’s an accountable plan, the reimbursements should not be included in the employee’s W-2. Nor should there be a 1099.
    The accountable plan means that the employee is turning over expense reports (which may use the per diem rates) and returning any excess funds, above the allowable costs and per diems.

    And no, it does not break even if the employee reports the per diems on Form 2106,
    Why?
    1) He loses the 2% of adjusted gross by which his expenses are reduced on Schedule A.
    2) He might not have been able to itemize at all without these expenses. Which means he’s giving up some or all of his standard deduction. Without the employee business expenses, he might have been able to use the full standard deduction.
    3) By itemizing employee business expenses, especially high expenses, his tax return becomes an audit risk. Using the standard deduction, there’s nothing for the IRS to audit.

    And yes, Don has started me thinking. I will be doing some more research and responding to him soon.

    Thanks.

    Hugs
    Eva

  5. Kelly says:

    Yes, mental juices indeed. TaxMama, if an employee worked for a company with an accountable plan for travel expenses, wouldn’t the per diem reimbursement from the company zero out any lodging per diem expenses on the employee’s Form 2106?

    If the expenses were unreimbursed, then I can wrap my head around the 2016 expense lodging per diem deduction, but I don’t see when the per diem would kick into a tax beneficial situation otherwise.

    Thank you!

  6. DON says:

    I understand employees and self-employed individuals can use a per diem for M&I, but I have not heard either can use a per diem for lodging. (Bracey, TC Memo-1998-254)

    Thanks for getting the mental juices flowing!

  7. TaxMama says:

    Yes, and employees can use per diems on their own Form 2106.

    Or have I been winning this issue on all those audits and Tax Court petitions purely by accident.

    Believe me, Don. I don’t know where you’ve been.
    But employees have been using per diems for decades – successfully.
    Read the Tax Code – it really does permit employees to use this as an alternate to actual expenses – just like mileage.

  8. TaxMama says:

    of course they can, Don.
    Who else could use it if business owners couldn’t and employees could not?
    That leaves no one else!

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