The IRS pays extra-close attention to deductions claimed for business travel expenses. As a result, both employers and employees must meet strict recordkeeping requirements or face the consequences. Fortunately, you can obtain some relief by using IRS-approved per diem allowances in lieu of accounting for every expense.
The per diems are actually the allowances approved for travel by U.S. government employees. But a business owner cannot use either type of per diem allowance if he or she owns 10% or more of the company.
There are two basic per diem rates:
- The first is based separately on the employee’s travel destination.
- The second depends on the annual “high–low” rates established each year for certain areas.
Starting point: As long as employees properly account for their business travel expenses, including the cost of meals and lodging, employer-paid reimbursements are tax-free to the employees and deductible by the company. But this can lead to a recordkeeping nightmare. With a per diem allowance, employees do not have to keep receipts for all of their travel expenses. The employer simply pays the government-approved allowance—without any questions.
Employees do not even have to report the payments on their tax return. However, they still must substantiate the time, place and business purpose of their business travel.
In addition to adjusting the allowances for each specific travel destination, the government establishes a flat rate for certain high-cost areas. The list of high-cost areas includes business centers such as New York City and San Francisco. In addition, other areas may be included on a seasonal basis such as Vail in the winter or Nantucket in the summer. All the locations that are not listed as high-cost areas automatically fall into the low-cost category.
New rates: The IRS recently announced new per diem rates for the government’s 2012 fiscal year. (The fiscal year runs from October 1, 2011, through September 30, 2012, but these rates may be used throughout 2012.) Following a recent trend, the increases were relatively small. The IRS-approved per diem rate for the 2012 fiscal year ranges from $123 (the same rate that was used in 2011) to $367.
For employers using the high–low method, the per diem rate for high-cost areas is $242, up $9 from 2011. The rate for low-cost areas increased by $3 to $163. Note: The government initially intended to discontinue the high–low rates this year but subsequently relented due to public response.
To reduce the paperwork burden, you might use the high–low method for employees who travel extensively, especially if they generally travel to major cities. On the other hand, you can require other employees to use the specific-location method if they frequently travel to low-cost areas.
Finally, you can have those employees who travel infrequently keep detailed records of their actual expenses.
Remember, this is just an overview of the basic rules. Consult a Condley and Company, L.L.P. professional tax adviser concerning your situation.