How do you Calculate Per Diem Deductions?
Per diem deductions that a taxpayer can deduct for unreimbursed business expenses including updates for the Tax Cuts and Jobs Act (TCJA).
What is a Per Diem Reimbursement?
Per diem is a Latin phrase that literally means ‘for one day’. The phrase is also used to describe a type of business travel expense plan utilized by many businesses to compensate employees for business travel expenses. Under a per-diem plan business expense reimbursements are calculated on a day-by-day basis. It is typically a fixed, per-day, amount paid to employees (or contractors) to cover business expenses for travel meetings or other purposes. Basically, a per diem is an allowance paid to an employee for lodging, meals, entertainment, and incidental expenses incurred when traveling. In some cases, the taxpayer can take per diem deductions from their tax return when per diem reimbursements were not given.
For example, say Jane Doe works for Acme, Inc. and for her job she needs to go on a three-day overnight trip. The company pre-pays her hotel and flight and gives her $50 per-day to compensate her for the business expenses she will incur during the trip. For example, for meals and incidentals. The company booked and paid for her hotel and flights before the trip. Therefore, instead of Jane having to make all of her business expense purchases on her own credit card, and be reimbursed later, the company reimburses her for the expenses in advance in the form of a per-day allowance amount.
A per-diem plan is ideal for companies that don’t want to flood their accounting departments with expense reimbursements. The government specifies a maximum per diem amount and these rates are different for each city. They depend on whether or not the employee travels in his or her home area, away from home, or internationally. For up-to-date per diem rates for each city and each year please visit this page: Per Deim Rates.
Are Per Diem Reimbursements Tax Deductible?
According to the IRS per diem reimbursements are non-taxable. Even if there is a surplus of money after the employee has paid all of their expenses. However, this is not true if the per diem reimbursement amount exceeds the federal rate. If the per diem reimbursement exceeds the federal amount, the amount in excess is taxed to the employee. Also, the payments are taxable to the employee if the employee does not provide a complete expense report. For independent contractors, per diem payments over the federal amount are reportable income and will be reported on Form 1099M.
For years before 2018 per diem rates for expenses that weren’t reimbursed by a taxpayer’s employer were deductible on a Schedule A. These expenses were deducted as miscellaneous deductions and were subject to a 2% floor. The 2% floor means that the taxpayer can deduct only up to 2% of their Adjusted Gross Income (AGI).
For years 2018 through 2025 the Tax Cuts and Jobs Act (TCJA) eliminated unreimbursed job expenses. Also, miscellaneous itemized deductions subject to the 2% floor. Expenses included in the Tax Cuts and Jobs Act include unreimbursed travel and mileage.
What does this mean for businesses that use the standard mileage rate?
This means that the standard mileage rate cannot be used for per diem deductions of employee travel expenses between 2018 to 2025.
How does this affect the self-employed?
Self-employed can still deduct business-related expenses. Also, the self-employed taxpayers can only use the per diem rates for meal costs.
Ask your employer about increased reimbursements if you previously deducted unreimbursed job expenses that you can no longer deduct due to the TCJA.
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