Per Diem Wasted

Today TaxMama hears from Bob in the TaxQuips Forum, who is trying to get it right. Let me summarize.  “I live in NJ and had a temporary job in DC for 6 months in 2010 (total 196 calendar days). I used Pub 1542 [per diem rates] for DC of $258 per day ($65 M&IE and $193 lodging) (Table 1), resulting in $50,568.00 worth of expenses. Did I figure this correctly? And if I did, why doesn’t this lower my taxes? Nothing I do brings down my tax liability!”

Dear Bob,

OK, you’ve done a lot of good work.

IRS allows the per diem rates for each night you spend in your business location, away from home. So, no, it does not have to be just the days you’re actually working, as long as you’re stuck there for months at a time – in a TEMPORARY location.

 As to the meals, the per diem rate is reduced by 50%. The software will do this automatically if you enter the meals in the right place.

 Now, why does this not change your net tax liability? Three tiny little letters:  AMT.

 Most likely, with all your other itemized deductions, you have hit the alternative minimum tax threshold. Look at the amount of AMT on page 2 of your Form 1040.

Remove some expenses and watch how AMT decreases. Add the expenses back in – and watch as AMT increases. It would be fun if it weren’t your own money. 

The good news?

Although you may not get a break now, you are building up AMT credits for future use. If you can figure out how to get them to work.  

On the other hand, you may want to have a tax professional do two things for you. 1) Review your tax return before you file.  2) Do some tax planning, so you can avoid this AMT trap in the future.

In fact, you may want to change the way you and your company handle your business expenses before your next temporary assignment.

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

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22 thoughts on “Per Diem Wasted

  1. TaxMama says:

    Hi Amanda,

    Yes, on your tax return, you may use the per diem lodging rate.
    But you must use it for ALL your travels for the whole year.
    On Form 2106 enter the per diems for your travels.
    Deduct any reimbursements you have received.

    If the per diems are more than your reimbursements,
    you have a deduction!

  2. Amanda says:

    Hi so i am still confused about the lodging rate. I am not self-employed my employer does give me a per-Diem each week. Can i use a standard allowance per day like i do with meals or do i have to use the actual rate?

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  4. Marilyn Herczog, EA says:

    So does all this mean that a self employed person can use the per diem rate for meals but not lodging?. You can see I’m procrastinating since it’s 10:30pm on 4/17 and I’m reading your column now.

  5. TaxMama says:

    Hi Jean,

    Your citation is where we started with self-employed individuals. Correct.
    They are not generally entitled to use the per diem rate.

    However, yes, in the absence of receipts AFTER making reasonable efforts to recreate the data, Cohan applies in all cases.

    Hugs
    Eva

  6. Jean Parrister says:

    Regarding the discussion about a self-employed sole proprietor taking the per diem for lodging instead of tallying the actual expense, I found:

    “There is no optional standard lodging amount similar to the standard meal allowance. Your allowable lodging expense deduction is your actual cost.”

    https://www.irs.gov/publications/p463/ch01.html#en_US_2011_publink100033773

    Given the loss or absence of receipts would it still be considered reasonable to cite the Cohan rule and use the GSA in publication 1542 per diems for lodging?

  7. TaxMama says:

    Hi Monty,

    He is not getting any employer reimbursement for either his meals or the per diem.
    That’s why his per diem meals are reduced by 50%.
    And that’s why Alan is saying he is not entitled to use the per diem rates for lodging.

    If Bob were getting any kinds of employer reimbursements, Alan would not be so angry with me.

    Hugs
    Eva

  8. Monty Lee says:

    different subtopic: why are per diem meals, when reimbursed by employer subject to 50% deduction? isn’t it the employer who is actually taking the meal expense and therefore employer is subject to 50%?

  9. TaxMama says:

    Dear Alan,
    I am surprised at you!

    “How can you ignore two of the best reference books in the country?”
    The IRS themselves say that we are not to rely on anything they say, even if it is in writing. IRS says they cannot be held responsible for the errors in their publication. And yes, their publications are riddled with errors. I send the Stakeholder Relations office reports of errors on a regular basis. (In fact, one team told me they won an annual award because of the information I sent them.)

    So far, you have not provided a specific quote.
    You have relied entirely on publications and vehement CAPITAL LETTERS to support your argument.
    You have not looked at the tax code (nor indicate that you even know what code section is involved).
    You have not pulled up any Tax Court cases, Revenue Rulings, Regulations or anything else to support your position.

    All this, even after Roger B. Adams, EA taught you how to do tax research in our class.

    All this, after I have already told you that IRS counsel, IRS Appeals and the Tax Court has sustained per diem lodging expenses for real-live audits. I was able to support my position to them.

    You cannot support your position.
    If you do this in an audit, you are doing your client a disservice.
    You are a much better EA than this.

    Alas….sigh.

    Hugs
    Eva

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