How should substantiation of per diem expenses be documented for international business travel?

To substantiate per diem expenses for international business travel, the taxpayer must comply with the substantiation requirements set forth in the Internal Revenue Code, Treasury Regulations, and IRS guidance. The following outlines the key requirements and procedures:

1. General Substantiation Requirements

IRC §274(d) requires that no deduction or credit is allowed for any traveling expense (including meals and lodging while away from home) unless the taxpayer substantiates by adequate records or sufficient evidence corroborating the taxpayer’s own statement:- The amount of the expense,- The time and place of the travel,- The business purpose of the expense, and- The business relationship to the taxpayer of the persons benefited.

Treas. Reg. §1.274-5(c)(2)(iii)(A) further specifies that documentary evidence (such as receipts, paid bills, or similar evidence) is required for any expenditure for lodging while traveling away from home, and for any other expenditure of $75 or more, except for transportation charges if not readily available.

2. Per Diem Substantiation for International Travel

The IRS allows the use of per diem rates to substantiate the amount of expenses for lodging, meals, and incidental expenses, or for meals and incidental expenses only, in lieu of actual receipts, provided certain conditions are met.

a. Federal Per Diem Rates for International Travel

• For travel outside the continental United States (OCONUS), including foreign countries, the applicable per diem rates are established by the U.S. Department of State (for foreign localities) and the Department of Defense (for non-foreign OCONUS localities such as Alaska, Hawaii, and U.S. territories).
• These rates are published and updated regularly and are available at [state.gov]( for foreign areas and [defensetravel.dod.mil]( for non-foreign OCONUS.

b. Elements to Substantiate

Even when using per diem rates, the taxpayer must substantiate:- Time: Dates of departure and return, and number of days spent on business.- Place: The specific locality (city and country) where the travel occurred.- Business Purpose: The reason for the travel and how it relates to the taxpayer’s trade or business.- Business Relationship: If expenses are incurred for others, the relationship to the taxpayer.

c. Documentation Required

• Account Book, Diary, Log, or Statement of Expense: The taxpayer must maintain a contemporaneous record (such as a diary, log, or expense report) that records the above elements at or near the time of the expense.
• Supporting Documentary Evidence: For lodging, receipts are generally required unless the per diem method is used for both lodging and meals/incidental expenses. For meals and incidental expenses, receipts are not required if the per diem method is used, but the time, place, and business purpose must still be documented.

d. Per Diem Allowance Limitation

• The amount deemed substantiated for each day is the lesser of the per diem allowance paid or the federal per diem rate for the locality of travel for that day.
• If the per diem allowance exceeds the federal rate, the excess is treated as paid under a nonaccountable plan and must be included in the employee’s income.

e. Proration for Partial Days

• For partial days (such as the day of departure or return), the per diem rate must be prorated. The IRS allows either the method prescribed by the Federal Travel Regulations (typically ¾ of the daily rate for partial days) or any consistently applied reasonable method.

3. Special Considerations for International Travel

• Travel Allocation: If the trip is not entirely for business, expenses must be allocated between business and personal days. Only the business portion is deductible.
• Foreign Travel Rules: If the travel outside the U.S. is for more than one week or more than 25% of the time is for personal purposes, only the business portion of travel expenses is deductible.

4. Summary Table of Required Documentation

5. Practical Steps for Compliance

1. Maintain a contemporaneous log or diary recording the date, location, and business purpose for each day of international travel.
2. Retain travel itineraries, boarding passes, and hotel receipts (if not using per diem for lodging).
3. Document the per diem rates used (printouts from the State Department or DOD websites).
4. Prepare an expense report summarizing the number of business days, per diem rates applied, and total amount claimed.
5. If reimbursed by an employer, ensure the arrangement is an accountable plan (requires substantiation and return of excess) to avoid income inclusion.

In summary: For international business travel, substantiation of per diem expenses requires maintaining a contemporaneous record of the time, place, business purpose, and (if applicable) business relationship, and using the applicable federal per diem rates for the locality of travel. Receipts for meals and incidental expenses are not required if the per diem method is used, but documentation of the other elements is mandatory. For lodging, receipts are required unless the per diem method is used for lodging as well. If the per diem allowance exceeds the federal rate, the excess must be treated as income. Proper documentation and adherence to the accountable plan rules are essential for the expenses to be excluded from income and allowed as a deduction.