[Ken Smith]

I operate a small outdoor advertising service company [ 5 employees ] . Most of our work requires out of town trips from several days to several weeks. I have been paying all expenses for employees and deducting meal & misc. expenses from their checks. Considering changing to daily per diem system. How would this effect taxes for emplorer & employees?

[AtlantaTaxExpert]

Per diem reimbursements become TAXABLE compensation for the employee, because it is part of a NON-accountable plan. It is taxable because the reimbursement may exceed actual costs/expenses incurred. The employee CAN claim employee business expenses, but that is a hard deduction to claim.

If you have the employees submit an expense report, and you reimburse based on that expense report, then the reimbursement is TAX-FREE to the employee because it is part of an ACCOUNTABLE plan. Since the reimbursement matches the actual expenses, no tax is due. The employee cannot claim any deductions.

In either case, you can deduct the expenses on your business tax return.

It may be a pain in their butt's, but tax-wise, it is better that you have the employees track and report their expenses to you for reimbursement.

[MukatA]

For per diem rates read
IRS Publication 1542: Per Diem Rates; p. 4. It gives a list of lodging and M&IE rates for different states.
This gives the maximum per diem rate you can use without treating part of the per diem allowance as wages for tax purposes.

[AtlantaTaxExpert]

MukatA:

If Ken Smith reimburses his employees EXCLUSIVELY on the per diem rates, then the reimbursement is TAXABLE as a matter of law, because there is NO substantiation of the expenses incurred.

The taxability is ONLY for income taxes; FICA taxes would not apply.

The employees can partially offset the tax impact by using the same per diem rates as employee business expenses, but they have to file Form 2106, PLUS meet the 2% AGI floor, PLUS itemize to deduct. Further, once the deductions hit about $22,000, the AMT kicks in, negating the deduction for any amount OVER $22K.

THAT is why I recommended that he institute an accountable plan, so he could reimburse his employees tax-free!

[supera]

Hi ATE,

1) Regarding the expense report that you mention, is it sufficient that only an excel report be submitted or are ALL bills also required (under the ACCOUNTABLE plan)?

2) If lets say total per diem claimed is around $40/day.Is it necessary to submit an expense report at all (since its lower than the GSA max)?

3)Also, can someone claim rental apartment bills for per-diem?


Thanks!

[AtlantaTaxExpert]

1) An EXCEL spreadshet, by itself, would NOT be considered sufficient substantiation..

2) Yes.

3) Possibly, for a temporary job of less than one year.

[supera]

Sorry just wanted to confirm regarding (2).You mean regardless of amount, no matter how small or even below GSA limit,you still have to submit an expense report and bills for the per diem?

Can you pl elaborate provisions/rule references for (3) as my employer mentioned that the apt rent cannot be considered as per diem? (and yes the project is temp less than an year)

Thanks

[AtlantaTaxExpert]

Supera:

On #2, yes, that is correct. The definition of an accountable plan means that the employee submits expenses reports and receipts to substantiate his claim, then he gets reimbursed for his costs and NOTHING more. If your costs were $20, yet you got $40, you effectively received $20 extra dollars, and the IRS considers that taxable income. The fact that it is well below the published GSA per diem rate is irrelevant.

On item #3, you often have to examine the circumstances of each case. Per diem rates as specified in IRS Pub 1542 is broken down into two separate parts: lodging and M&IE (Meals and Incidental Expenses). The M&IE portion is ALWAYS deductible and most companies reimburse their employees for M&IE in virtually ALL case.

However, a single person who expects to live for ten months in a temporary location may transfer his tax home from his permanent home location to the temporary location, while someone who is married would not uproot his family for such a short period. If that were the case, the employer generally would reimburse the married person for the apartment rent, but NOT the single person, because the single person does NOT have the expense of maintaining two households.

The IRS takes the same position. For the rent on the temporary apartment to be deductible, the taxpayer would have to show that he/she is maintain TWO households, one at his permanent tax home, the second at the temporary location.