Per Diem Methods for Substantiating Meals and Lodging Expenses

A taxpayer must substantiate the amount, time, place, and business purpose of expenses paid or incurred in traveling away from home. Although the taxpayer has the option of keeping the actual records or travel expenses, the IRS has provided per diem allowances under which the amount of meals and incidental expenses (M&IE) may be deemed to be substantiated. The per diem allowances eliminate the need for substantiating actual costs (Rev. Proc. 2011-47). A taxpayer who uses per diem allowances to calculate the deductible amount must still substantiate the time, place, and business purpose of the travel by adequate records or other evidence.

Although most frequently used in the exployer-employee relationship, per diem allowances may be used in arrangements between any payor and payee, such as between independent contractors and those contracting with them. However, employees related to the payor under the related party rules of Code Sec. 267(b) (using a 10-percent common ownership standard) cannot use per diem substantiation methods.

Employees. The per diem method can be used to substantiate an employee's reimbursed expenses (for purposes of the employer's return) only if the reimbursement arrangement is an accountable plan and the allowance:

• is paid with respect to ordinary and necessary expenses incurred or that the employer reasonably expects to be incurred by an employee for lodging and/or M&IE while traveling away from home in connection with the performance of services as an employee;
• is reasonably calculated not to exceed the amount of the expense or the anticipated expenses; and
• is paid at the applicable federal per diem rate, a flat rate, or stated schedule.

Types of Per Diem Allownaces. There are three types of per diem allowances:

• lodging plus M&IE, which provides a per diem allowance to cover lodging as well as meals and incidental expenses;
• M&IE only, which provides a per diem allowance for meals and incidental expenses only; and
• incidental expenses only, to be used when no meal or lodging expenses are incurred (Rev. Proc. 2011-47).

Incidental expenses has the same meaning as in the Federal Travel Regulations (41 C.F.R. 300-3.1). Under those regulations, incidental expenses include only fees and tips given to porters, baggage carriers, hotel staff, and staff on ships. Transportation between places of lodging or business  and places where meals are taken, and the mailing cost of filing travel vouchers and paying employer-sponsored charge card billings, are not incidental expenses. Taxpayers using per diem rates may separately deduct or be reimbursed for such transportation and mailing expenses (Notice 2017-54; Notice 2016-58).

Expenses of laundry, lodging taxes, and telephone calls are not incidental expenses (IRS Pub. 463). Lodging taxes for travel within the continental United States and for nonforeign travel outside the continental United States are reimbursable miscellaneous expenses. However, lodging taxes have not been removed from the foreign per diem rates set by the U.S. State Department (41 C.F.R. 301-11.27).

Allowances Exceeding Federal Rates. If expenses are substantiated using a per diem amount, regardless of whether it covers lodging plus M&IE or only M&"IE, any reimbursement that exceeds the relevant federal per diem rates for that type of allowance must be included in the employee's (or independent contractor's) gross income. The excess portion is treated as paid under a nonaccountable plan, thus it must be reported on the employee's Form W-2 and is subject to withholding (Rev. § 1.62-2(h)(2)(i)(B)(1)).