Because you run your own business, it’s pretty safe to say that recordkeeping is one of the many administrative monkeys on your back.
Which is why the idea of a set-dollar travel per diem may seem mighty appealing. Think of it—instead of tracking every dollar you spend on travel meals and lodging, you just deduct a fixed amount and call it a day. Easy peasy.
Not so fast.
As with many things in the tax code, there’s a catch with this seemingly simple plan.
If you were an employee and not an owner, the IRS would allow your employer to use a single per diem amount for the day. But your tax life as a business owner (albeit highly beneficial overall) does not allow you to use the most desirable single-amount-daily per diem.
Below are the three possibilities for the travel per diem reimbursement, one of which is not available to you as an owner, as you will learn in this article:
- Per diem allowance (lodging, meals, and incidentals)
- Standard meal allowance (meals and incidentals) at rates ranging from $55 to $76 per day, depending on location
- Incidentals only at $5 per day
The IRS currently defines “incidentals” as fees and tips given to porters, baggage carriers, bellhops, hotel staff, and staff on ships.
Federal Amounts Vary by Location
The applicable federal amounts for the per diem allowance and standard meal allowance are adjusted for inflation and vary by location; current amounts by location are at the General Services Administration website.
How is location determined? The place you sleep on a given day is the location that dictates the amounts for that day.
Limits on Per Diems for Business Owners
Here’s the stick-it-to-the-business-owners—part 1.
If you file your tax return as a proprietor or a corporation (C corporation or S corporation) in which you own more than 10 percent, you may not use the daily per diem allowance that covers lodging, meals, and incidentals. You are also barred from using the high-low standard meal allowance.
There is no prohibition, however, on owners using the standard meal allowance of $55 to $76 per day (i.e., meals and incidentals but no lodging).
If you use the standard meal allowance, you don’t need receipts in order to deduct your travel meals, but you must substantiate the time, place, and business purpose of your travel.
Is the no-receipts-for-the-per-diem allowance a big deal for the meal expenses of the business owner? No.
If you deduct your travel meals using the actual expense method, you don’t need receipts unless a meal costs $75 or more. And as with the per diems, you must still substantiate the time, place, and business purpose of your travel.
Using either the standard meal allowance or actual expenses, your business meal tax deduction is limited to either 50 percent or 80 percent. You likely qualify for 50 percent. The more beneficial 80 percent deduction is reserved for:
- air transportation pilots, crew, dispatchers, mechanics, and control tower operators;
- interstate truck operators and bus drivers;
- certain railroad employees, such as engineers, conductors, train crews, dispatchers, and control operations personnel; and
- certain merchant marines.
Paperwork Requirements Remain
Here’s the stick-it-to-the-business-owners—part 2.
Unlike employees, who are done with substantiation as soon as they hand it off to their employers, Form 1040 Schedule C filers and more-than-10-percent corporate owners must keep substantiation records on hand in the event the IRS asks to see them at some point.
Because business owners cannot take advantage of the daily per diem that includes lodging, business owners always need a receipt for lodging, regardless of the amount you spend or the method of deduction.
How Much Do You Eat and Drink?
This may sound like an odd question, but think about it: if you regularly spend far less on travel meals and incidentals than the government-established per diem rates, those rates allow you to legitimately deduct more than you spend.
Example. John travels to Sacramento, Calif. The daily per diem is $66 for meals and incidentals. Say John spends $25 for breakfast at the hotel, $15 for lunch at a fast food place, $70 for dinner and drinks, and he tips the maid $5. His comparison cost using the actual deduction method is $115.
- Put himself on per diem and deduct $33 under the 50 percent rule, or
- Deduct $60 ($110 in meals x 50 percent + $5 tip).
John has an easy financial choice.
And further, John faces no real tax recordkeeping difference. He needs the lodging receipts for either the per diem method or the actual expenses. John needs no receipts for travel expenses that are less than $75. His meals are all under $75. The tip to the maid is under $75.
For the business owner, the travel per diem option is simply a shiny object with no real business value. On the surface, it looks good.
But the special rules that don’t allow the self-employed or the more-than-10-percent corporate business owner to use the full per diem rates that include lodging do almost nothing to reduce the paperwork burden for the business owner.
The owner continues to need receipts for lodging, carries the burden of proof, and likely gets robbed of deductions. In short, for most business owners, the travel per diem is a bad tax planning option.