Take it from someone who knows: “the hardest thing in the world to understand is income taxes,” since not only is tax law as complicated as a maze, but it may change from year to year. Albert Einstein, of course.
Don’t be concerned if you find the tax regulations regulating company deductions and allowances confusing, even Einstein — you know the guy who invented relativity theory and had a 160 IQ — was perplexed by them.
Despite the byzantine nature of tax regulations, there is a method to the madness, which may help to maintain some sanity as we examine the taxing realm of response plans and per diem in the United States.
Per Diem and Accountable Plans
Per diem and accountable plans are inextricably tied to income taxes, which are administered and collected by the U.S. Internal Revenue Service (IRS). Under IRS rules, an accountable plan is any reimbursement or other expense allowance arrangement that meets all of the following requirements:
- the advances, allowances, or reimbursements must relate to business expenses or to the performance of services as an employee
- the employee must submit information sufficient to satisfy the “adequate accounting rules” with respect to travel and entertainment. For other reimbursed expenses, information must be submitted that is sufficient to enable the payer to identify the specific nature of each expense and to conclude that the expense is an employee business expense. Each of the elements of an expenditure or use must be substantiated, and
- the employee must pay back to the employer within a reasonable time the amount of the reimbursement or allowance that cannot be substantiated. If an employee fails to return amounts in excess of the substantiated amounts within a reasonable time, those amounts will be added to his or her gross income and be subject to income tax.
Accordingly, a per diem arrangement may fall under this definition, although most often the term “accountable plan” refers to reimbursements based on the detailed substantiation of every item of expenditure, while per diem are fixed amounts based on average costs.
Per Diem Perks
Per diem in the United States have advantages not found in general accountable plans. First, they reduce or eliminate the need to keep detailed records or expense reports, which frees both employee and employer from a set of rather mundane tasks. But although per diem reduce the reporting burden of employees, they do not entirely eliminate it.
Even though there is no requirement to substantiate every item of expenditure made, under a per diem arrangement, employees must still submit an “expense report” that shows (i) the business purpose of the trip; (ii) the location of the venue and dates visited; and (iii) receipts for lodging, where only the meals (M&IE) per diem is used.
Second, there is no requirement to pay back balances. If an employee spends $199 to cover the cost of one night’s lodging at a hotel in New York City, where the lodging per diem is $223, he does not need to return the remaining $24 to his employer.
Nevertheless, despite these advantages, per diem in the United States is not as simple as it might appear superficially, for per diem rates vary widely.
Since a per diem is money paid to an employee by an employer, it can be mistaken for remuneration to the employee. But remuneration is subject to income taxes, while per diem are not, hence the substantiation rules. As a result, most per diem regimes tend to conform to IRS guidelines, which are the rates published by certain federal departments. Private companies, of course, need not follow the IRS rates.
However, greater amounts will be regarded as taxable income.
The easiest way to understand this is by using an example. Imagine if the ABC Corp pays Jack a per diem of $350 to cover meals and accommodation while he goes to New York City on company business. As it turns out, for New York City, the federal per diem meal rate is $76 and the federal per diem lodging rate is $223, a total of $299.
Jack is being paid $51 more than the federal rates, which would be assessed as an addition to his income. As the example illustrates, organisations can pay their staff per diem that exceeds federal guidelines, but the amounts above the federal rates will be treated as income for the employee.
For employers, the benefits are equally enticing. ABC will be able to deduct 50% of any amount spent on meals, i.e. $38 plus 100% of the amount given for accommodation. The company can use either of two methods to categorise the $350 cost. Under the first, ABC deducts the M&IE rate and treats the balance as lodging. In this instance, food and beverage expenses would be $76, while $350 – $76 = $274 would be accommodation expenses.
Under the second method, 40% ($140) of the payment is treated as payment for meals and 60% ($210) as payment for lodging. Since 100% of accommodation expenses are deductible, while only 50% of food and beverage expenses are, ABC Corp will most likely opt for the first method.
Travelling Away from Home
Per diem allowances in the United States generally cover (i) non-entertainment-related meals, (ii) incidental expenses, and (iii) lodging or accommodation costs, known together as “travel expenses” or “travelling away from home expenses” incurred that are associated with business travel. “Travel expenses”, in this setting, do not include the actual cost of getting around by car or train or some other method, which are referred to as “transportation expenses.”
The IRS uses rates published by three federal departments: the General Services Administration (GSA); the Department of State (DoS); and the Department of Defense (DoD). The GSA rates, known as CONUS, apply to the continental U.S. Rates for non-continental areas are set by the DoD and include Alaska, American Samoa, Guam, Hawaii, Midway, the Northern Mariana Islands, Puerto Rico, the U.S. Virgin Islands, and Wake Island.
The Department of State establishes per diem rates, known as OCONUS, for all other foreign areas.
Most of the continental U.S. is covered by the standard CONUS per diem rate of $149, made up of $94 for lodging and $55 for meals and incidental expenses. However, in fiscal year (FY) 2019, there are 325 Non-Standard Areas (NSAs) that have per diem rates higher than the standard CONUS rate.
Meals & Incidental Expenses Per Diem
The table below offers a detailed breakdown of “Meals & Incidental Expenses”, which are composed of amounts for breakfast, lunch, dinner and incidentals. The first/last day amounts are reduced allowances of 75%.
Meals & Incidental Expenses
The standard amount, which applies to most U.S. cities, is $55, made up of $13 for breakfast, $14 for lunch, $23 for dinner and $5 to cover incidental expenses. Incidental expenses are fees and tips given to porters, baggage carriers, hotel staff, and staff on ships. Transportation between places of lodging or business and places where meals are taken, and the mailing cost of filing travel vouchers and paying employer-sponsored charge card billings, are no longer included in incidental expenses.
The 325 Non-Standard Areas (NSAs) fall into five (5) brackets, according to the cost of living expenses (COLA). New York City is in the highest bracket.
New York City
The capital of New York State, Albany, is somewhere in the middle.
Lodging Per Diem in the United States
As might be expected, per diem in the United States, when it comes to lodging, are much more and vary considerably.
New York City
In some cities, like New York City, the rates can climb quite rapidly, as indicated above. In others, such as Albany, they may stay the same for some time.
For a city like Oneonta (pop. ~14,000), in central New York, standard rates would apply.
Oneonta – Meals & Incidental Expenses
Oneonta – Lodging
Using per diem greatly simplifies accounting for travel expenses, which include the costs of lodging, meals, and incidentals. There is no need to substantiate every item of expenditure made, under a per diem arrangement, but employees must still submit an “expense report” that shows (i) the business purpose of the trip; (ii) the location of the venue and dates visited; and (iii) receipts for lodging, where only the meals (M&IE) per diem is used.
High-Low Substantiation Rates
The IRS has attempted to simplify the per diem system by offering a “high-low” method of ascertaining per diem rates. For the employee who is travelling to many cities falling under different rate brackets, the job of keeping track of rates may prove rather onerous. In that case, he has the option of using the “high-low substantiation rates.”
The high-low substantiation reduces the number of rate brackets to two: high and low, as shown below. High-cost areas include big cities like New York City, Los Angeles, and Boston.
Wining and Dining
The Tax Cuts and Jobs Act of 2017 cut more than just taxes. It severed entertainment expenses from expenses for meals and incidentals. Now entertainment expenses are no longer deductible if incurred after December 2017. This means that the per diem for entertainment is an extinct creature. If entertainment is a non-deductible expense for employers, it can hardly be a deductible one for employees.
Getting It Straight
The rules governing per diem in the United States can seem daunting, not least because they are set out using confusing terms. IRS publications are littered with a variety of expressions the definitions of which appear impenetrable. So to guide the reader as he travels through the regulatory landscape, we’ve put together a brief glossary.
Federal per diem rate
The federal per diem rate is the amount paid to U.S. federal government employees for lodging, meals and incidental expenses when they travel away from home within the United States for business purposes. Amounts less than or equal to the rate do not affect employees’ tax liability. Amounts above the rate are regarded as income and may increase tax liability.
Incidental expenses are fees and tips given to porters, baggage carriers, hotel staff, and staff on ships.
Substantiation includes the reporting and evidence required to verify that a per diem qualifies as a business expense.
Travel expenses are expenses incurred for lodging, meals and incidental expenses.
Transportation expenses are the costs of travelling from one job to another, between customers, or from the business to another location to work.
Bon Voyage with Rydoo
It’s been said that the journey is just as important as the destination. For business travellers, it should also be smooth, devoid of irritations that arise when one bumps up against procedures and policies. Maybe Rydoo can smooth your journey through the bureaucratic maze.
With the help of our partner Deloitte, we’ve worked hard to incorporate a host of features for our US customers, making sure we offer a solution that addresses domestic needs. Benchmarks per diem can be uploaded in the app for instance. Travellers need only enter their trip details in the Rydoo expense management app via their smartphone and the information is automatically computed based on your company policy.
The traveller can then submit all his eligible per diem allowances for approval with one simple tap.
Rydoo also makes sure everything is in perfect compliance with US federal law. For example, when a meal has been entered on the same day as a per diem, a warning will be sent to users and controllers. This means that all expenditures are categorised correctly, leaving little room for error or abuse. The Rydoo expense management platform provides real-time expense management for the entire company.
Employees on the road can easily upload their receipts through the app, while managers are able to approve or decline them just as quickly. Rydoo also offers a travel solution that can be integrated with the expense management platform. With Rydoo’s travel app, the business traveller can book flights and accommodation, and much more. Let Rydoo make your trip easier. Get started with your free trial account.