Per diems are a source of frustration for many tax professionals due to their complicated nature. An employer can use a per diem allowance to reimburse employees for business travel expenses incurred while away from home. This allowance is in lieu of reimbursing the actual travel expenses. There is a per diem rate for meal and incidental expenses, and a per diem for lodging (excluding taxes). Per diem payments are not included in the employee’s wages if the payment is equal to or less than the federal per diem rate and the employer receives an expense report from the employee.
The per diem rates (standard rates) for destinations within the lower 48 continental United States (CONUS) are set by the General Services Administration (GSA) and are shown below. Approximately 2,600 counties are covered by the standard per diem rate.
|Standard Rate (see GSA for rates for specific cities)||Meal and Incidental Expense (per day)||Lodging (per day)||Total (per day)|
|Oct. 1, 2021-Sept. 30, 2022||$59||$96||$155|
|Oct. 1, 2020-Sept. 30, 2021||$55||$96||$151|
The rates are effective Oct. 1 each year and the IRS allows taxpayers to use the old rates for the entire calendar year. For 2021, taxpayers can use the rates in effect for January through September 2021 for the entire year or switch to the updated rates on Oct. 1, 2021.
Generally, business meal expense results in a 50% deduction (or stated another way, a 50% disallowance) on the tax return. The 50% disallowance applies to expenses for all business meals, including those incurred while traveling away from home for business. When an employer uses a per diem method for employees’ travel expenses, the meal and incidental rate is to be treated as expense for food and beverages, and the employer is subject to the 50 % disallowance rule.
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR) provides that the 50% limit does not apply to food or beverages provided by a restaurant that were paid or incurred in 2021 and 2022. Thus, for tax years 2021 and 2022 taxpayers are allowed to deduct 100% of business meals provided by restaurants.
Food and beverage expenses must meet all the following to be deductible:
- The expense cannot be lavish or extravagant under the circumstances
- The taxpayer, or an employee of the taxpayer, is present when the food and beverages are provided
- The food and beverages are provided to the taxpayer or a business associate
So, the question is: what does the TCDTR guidance mean for employers that use the per diem for employee meals? Can they deduct 100% of the meal expense?
The IRS addressed this question on Nov. 16 when it released Notice 2021-63, which states taxpayers who properly apply the per diem rate rules in Rev. Proc. 2019-48 may treat the meal portion of a per diem rate or allowance paid or incurred after Dec. 31, 2020, and before Jan. 1, 2023, as attributable to food or beverages provided by a restaurant.
For purposes of the temporary 100% deduction for expenses paid or incurred in 2021 and 2022 for food or beverages provided by a restaurant, the definition of restaurant is a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.
This is great news for taxpayers who use the per diem and follow the guidance. These taxpayers can deduct 100% of business meal expense for 2021 and 2022.
Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.