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BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 798
Experience:  Owner of a CPA firm
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For a Corporation if they are paying employees per diem as

Customer Question

For a Corporation if they are paying employees per diem as per IRS rates when they are travelling to different client locations, what kind of documentation are needed to keep in case of an audit. Do they need to ask the employees to turn in all the lodging and meals receipts or the fact that payment is made as per the IRS rate makes it acceptable to not have the receipts.
Can they dedcut in full the expenses paid as per diem in their tax returns?
Submitted: 4 years ago.
Category: Tax
Expert:  BK-CPA replied 4 years ago.

The records required are not as stringent when using the per diem methods (that is why employers like them), but you do need to document travel dates, business purposes, etc. The employees must be getting their per diem amounts from an employer who is incurring such expenses in the ordinary and necessary course of business. I have selected a couple of IRS publications below for further clarification for you.

 

The corporation gets the deduction while the employees are simply not required to include amounts in income. Excess reimbursements and/or unreimbursed amounts may end up being reported on the employees' tax returns, so it may be best for employees to save receipts as applicable.

 

Thank you for your question.

 

 

 

 

http://www.irs.gov/publications/p463/ch05.html#en_US_publink100034069

 

What Are Adequate Records?

 

You should keep the proof you need in an account book, diary, log, statement of expense, trip sheets, or similar record. You should also keep documentary evidence that, together with your record, will support each element of an expense.

 

Documentary evidence. You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses.

 

Exception. Documentary evidence is not needed if any of the following conditions apply.

  • You have meals or lodging expenses while traveling away from home for which you account to your employer under an accountable plan, and you use a per diem allowance method that includes meals and/or lodging.

  • Your expense, other than lodging, is less than $75.

  • You have a transportation expense for which a receipt is not readily available.

 

 

 

....

 

 

http://www.irs.gov/publications/p463/ch06.html#en_US_publink100034122

 

Per Diem and Car Allowances

 

If your employer reimburses you for your expenses using a per diem or a car allowance, you can generally use the allowance as proof for the amount of your expenses. A per diem or car allowance satisfies the adequate accounting requirements for the amount of your expenses only if all of the following conditions apply.

  • Your employer reasonably limits payments of your expenses to those that are ordinary and necessary in the conduct of the trade or business.

  • The allowance is similar in form to and not more than the federal rate (defined later).

  • You prove the time (dates), place, and business purpose of your expenses to your employer within a reasonable period of time.

  • You are not related to your employer (as defined next). If you are related to your employer, you must be able to prove your expenses to the IRS even if you have already adequately accounted to your employer and returned any excess reimbursement.

If the IRS finds that an employer's travel allowance practices are not based on reasonably accurate estimates of travel costs (including recognition of cost differences in different areas for per diem amounts), you will not be considered to have accounted to your employer. In this case, you must be able to prove your expenses to the IRS.

 



Edited by BK-CPA on 9/1/2010 at 8:17 PM EST
Customer: replied 4 years ago.

Is it true that per diem meal allowance paid to an employee which is less than the federal rate allowed, is only 50% deductible by the company?

 

The employee is working away from home on client job and gets $ 20 meal allownace per day.

Expert:  BK-CPA replied 4 years ago.

Here is some great information (see below, I bold parts for you). The direct answer to your question is yes, the deduction is generally limited to 50%, though not when you include the full amount as income to an employee or contractor (they, then, can claim the deduction on their returns subject to limitation while your deduction is a wash in general against the employee's / contractor's taxable income).

..

..

http://www.irs.gov/pub/irs-drop/rp-04-29.pdf

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http://www.irs.gov/newsroom/article/0,,id=123026,00.html

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..

.01 Section 162(a) allows a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including certain expenses for meals and entertainment.

...

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.02 Section 274(d) disallows a § 162 deduction for any expense for travel (including meals and lodging while away from home), entertainment, gifts, or listed property unless the taxpayer substantiates the elements of the expense by adequate records or by sufficient evidence. See § 1.274-5T of the Income Tax Regulations (here it is).

..

..

Sec. 1.274-5 Substantiation requirements.

http://edocket.access.gpo.gov/cfr_2009/aprqtr/26cfr1.274-5.htm

...

Sec. 1.274-5T Substantiation requirements (temporary).

http://edocket.access.gpo.gov/cfr_2009/aprqtr/26cfr1.274-5T.htm

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.03 Section 274(n)(1) provides that the amount allowable as a deduction for any expense for food or beverages, or any item with respect to an activity that is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with these activities, may not exceed 50% of the amount of the expense.

...

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.04 Section 274(n)(2)(A) provides that the 50% deduction disallowance of § 274(n)(1) does not apply to expenses described in § 274(e)(2) (expenses treated on the taxpayer's return as compensation to an employee under chapter 1 and as wages to the employee for purposes of chapter 24), (e)(3) (expenses paid or incurred under a reimbursement or similar arrangement in connection with the performance of services), (e)(4) (recreational and similar expenses for employees), (e)(7) (expenses relating to items available to the public), (e)(8) (expenses relating to entertainment sold to customers), or (e)(9) (expenses includible in income of persons who are not employees).

..

..

.05 Section 274(n)(2)(B) provides that the 50% deduction disallowance of § 274(n)(1) does not apply to an expense for food or beverages that is excludable from the gross income of the recipient under § 132(e) (relating to de minimis fringe benefits excluded from income under § 132(a)(4)).

..

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.06 Section 132(e) defines a de minimis fringe as any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer's employees) so small as to make accounting for it unreasonable or administratively impracticable. Under § 1.132-6(c), a cash fringe benefit (other than overtime meal money and local transportation fare) is never excludable as a de minimis fringe benefit. For example, expenses for meals and entertainment reimbursed to employees under an accountable plan (as defined in § 1.62-2(c)(2)) do not qualify as de minimis fringe benefits.

...

..

.07 Section 1.132-6(b) provides that the frequency with which similar fringes are provided by the employer to the employer's employees is generally determined by reference to the frequency with which the employer provides the fringes to each individual employee. However, if it would be administratively difficult to determine frequency with respect to individual employees, the frequency with which similar fringes are provided by the employer to the employer's employees is determined by reference to the workforce as a whole. This exception to the employee-measured frequency requirement does not apply to overtime meals, meal money, or local transportation fare.

..

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.08 Section 274(n)(2)(C) provides that the 50% deduction disallowance of § 274(n)(1) does not apply to an expense covered by a package involving a ticket described in § 274(l)(1)(B) (exception for certain charitable sports events).

..

...

.09 Section 274(n)(2)(D) provides that the 50% deduction disallowance of § 274(n)(1) does not apply to taxable payments or reimbursements of moving expenses of an employee by the employer.

...

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.10 Section 274(n)(2)(E) provides that the 50% deduction disallowance of § 274(n)(1) does not apply to expenses for food or beverages (i) required by Federal law to be provided to crew members of a commercial vessel, (ii) provided to crew members of certain commercial vessels, or (iii) provided on or in proximity to certain oil or gas platforms or drilling rigs.



Edited by BK-CPA on 9/1/2010 at 9:44 PM EST
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 798
Experience: Owner of a CPA firm
BK-CPA and 7 other Tax Specialists are ready to help you
Customer: replied 4 years ago.
Thanks, XXXXX XXXXX been very helpful.
Expert:  BK-CPA replied 4 years ago.
Good luck! Thank you too.

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