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I am an independent contractor who is reimbursed exact expenses for food, hotel, car, gas, etc. I cannot exceed the Govt per diem for my area. All money paid to me whether for labor or for expenses is shown as one total on my annual 1099 form from my company. The question: My new accountant says I can only deduct 50% of the meals because the other 50% is taxed. I think he is wrong since this is not entertainment which I understand is only half deductible. But he says since I am entitled to full per diem for meals ($40), whenever I actually charged only $10 for the day instead of the $40 allowed, I can deduct half of the $40 (i.e., $20). This makes no sense. I know some people just deduct all the money they received for reimbursements (including meals) from the labor and pay taxes only on the labor. Can anybody explain the correct thing to do IAW the IRS? Thanks!
Welcome to Just Answer. I am here to help you resolve your tax and finance concerns. Please feel free to ask anytime you need extra help.
The IRS is specific in the deductibility of meal expenses. They only allow the deduction of 50% of this cost. Here is a brief piece from them.
Taxpayers who travel away from home on business may deduct related expenses, including the cost of reaching their destination, the cost of lodging and meals and other ordinary and necessary expenses. Taxpayers are considered "traveling away from home" if their duties require them to be away from home substantially longer than an ordinary day's work and they need to sleep or rest to meet the demands of their work. The actual cost of meals and incidental expenses may be deducted or the taxpayer may use a standard meal allowance and reduced record keeping requirements. Regardless of the method used, meal deductions are generally limited to 50 percent as stated earlier. Only actual costs for lodging may be claimed as an expense and receipts must be kept for documentation. Expenses must be reasonable and appropriate; deductions for extravagant expenses are not allowable. More information is available in Publication 463, Travel, Entertainment, Gift, and Car Expenses.
As to your accountant's statement that you should use the higher per diem thereby saving some of this deduction (actually putting you ahead, there is a problem. If you only used $10 in billing for this cost, you will only be able to deduct the 1/2 of that or $5. Doing otherwise will create a risk if you are ever audited. Audits will involve the examination of actual billings and will determine that you have misstated the deduction. This is a risk you may not want to take.
I think my accountant was referring only to meals/incidentals, not hotel per diem. And he seems to be correct because as you noted:
The actual cost of meals and incidental expenses may be deducted or the taxpayer may use a standard meal allowance and reduced record keeping requirements. Regardless of the method used, meal deductions are generally limited to 50 percent as stated earlier. (This refers to 50% of the standard meal allowance as well as to actuals.)
What I find odd is that contractors sometimes get a 1099 form that only lists labor and not reimbursed expenses. Contractors who get those annual summaries tell me that they therefore do not have to pay any tax on expenses since the companies did not show they paid them.
The companies do show they paid the expenses and to whom they were paid in their records. They just do not issue the 1099 forms for this. It is strange that they would do this for some but not all. They could face penalties if the IRS determines they issued the forms incorrectly but that is not your concern as long as you are doing things correctly.
Thank you for the opportunity to assist you.