What are the IRS rules regarding the deductibility of per diem meal expenses for employees traveling to out-of-town jobsites, and how can businesses plan to maximize deductions?
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The deductibility of per diem meal expenses for employees traveling to out-of-town jobsites is governed by a combination of Internal Revenue Code (IRC) provisions, Treasury Regulations, IRS revenue procedures, and annual IRS notices. Below is a comprehensive explanation of the rules and planning considerations for maximizing deductions, based on the most current and relevant sources.
1. General Rule for Deductibility
Ordinary and Necessary Business Expense:Under IRC §162(a), a business may deduct ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including expenses for travel away from home.
Travel Away from Home:To qualify, the employee must be traveling away from their tax home (generally, their principal place of business) and the travel must require sleep or rest.
2. Per Diem Substantiation
Per Diem Allowance:Instead of substantiating actual meal expenses with receipts, employers may use a per diem allowance. The IRS publishes annual per diem rates for meals and incidental expenses (M&IE) for different localities, which are considered substantiated if the employee also substantiates the time, place, and business purpose of the travel.
Federal Per Diem Rate:The federal per diem M&IE rate varies by location and is published by the General Services Administration (GSA) for the continental U.S. (CONUS), and by the Department of Defense and State Department for other areas. For 2025, the standard M&IE rate for most small localities is $68 per day, with higher rates for high-cost areas.
Special Rates for Transportation Industry:Employees in the transportation industry may use a special M&IE rate ($80 per day for CONUS, $86 for OCONUS for the period Oct. 1, 2024 – Sept. 30, 2025).
High-Low Substantiation Method:The IRS allows a simplified high-low method, with a single high rate for designated high-cost localities and a low rate for all others. For the current period, the high rate is $319 and the low rate is $225 per day, with specified amounts allocated to meals for §274(n) purposes.
3. Deduction Limitations
50% Limitation:Generally, only 50% of the otherwise allowable meal expenses (including per diem amounts) are deductible under IRC §274(n). This applies whether the employer reimburses actual expenses or uses a per diem allowance.
Exceptions to the 50% Limit:- Certain meals provided for the convenience of the employer, or on offshore oil platforms, may be fully deductible.- For employees subject to Department of Transportation “hours of service” limits (e.g., certain truck drivers), the deductible percentage is increased to 80%.
Accountable vs. Nonaccountable Plans:- Accountable Plan: If the employer requires substantiation of time, place, and business purpose, and excess reimbursements are returned, the per diem is not included in the employee’s income and is not subject to payroll taxes.- Nonaccountable Plan: If these requirements are not met, the per diem is treated as wages, subject to income and employment taxes, and the employer may deduct it as compensation, but the employee may not deduct unreimbursed expenses (except for certain categories of employees).
4. Substantiation and Recordkeeping
Required Elements:To deduct per diem meal expenses, the employer must substantiate:- Amount (per diem rate)- Time (dates of travel)- Place (location of travel)- Business purpose
No Double Dipping:If a per diem is paid, the employee cannot also claim a deduction for actual meal expenses for the same travel days.
5. Planning to Maximize Deductions
a. Use the Per Diem Method:- Simplifies substantiation and recordkeeping.- Reduces the risk of disallowance for lack of receipts.- Use the highest applicable federal per diem rate for the locality to maximize the deduction.
b. Use Accountable Plans:- Ensure the plan requires substantiation of time, place, and business purpose, and return of excess reimbursements.- Payments under an accountable plan are not subject to payroll taxes and are not included in employee income.
c. Apply the High-Low Method Where Appropriate:- For travel within the continental U.S., the high-low method can simplify administration and may result in higher deductions for high-cost areas.
d. Prorate for Partial Days:- For travel days that are not full days, prorate the per diem (e.g., ¾ of the daily rate for departure and return days), as allowed by IRS rules.
e. Special Rules for Transportation Industry:- Use the special M&IE rate for transportation workers if eligible.
f. Avoid Nonaccountable Plans:- Nonaccountable plan payments are treated as wages, subject to payroll taxes, and do not provide a deduction for the employee.
g. Keep Up with Annual IRS Notices:- Per diem rates and high-cost localities are updated annually. Use the most current rates for each tax year.
6. Reporting
- Employers: Deduct per diem reimbursements as travel expenses (meals subject to the 50% limit) on the business tax return.
- Employees: If reimbursed under an accountable plan, do not report the per diem as income and do not claim a deduction. If under a nonaccountable plan, the per diem is included in wages and subject to tax.
7. Special Considerations
- Self-Employed Individuals: May use the federal M&IE rate to substantiate meal expenses for travel away from home, subject to the 50% limit.
- Certain Employees (e.g., performing artists, fee-basis officials, Armed Forces reservists): May deduct unreimbursed travel expenses as an above-the-line deduction, but most employees cannot deduct unreimbursed expenses due to the suspension of miscellaneous itemized deductions through 2025.
Summary: Businesses can deduct per diem meal expenses for employees traveling to out-of-town jobsites if the expenses are ordinary, necessary, and properly substantiated. The deduction is generally limited to 50% of the per diem amount, and the use of an accountable plan is essential to avoid payroll tax and income inclusion issues. Planning to use the highest applicable per diem rates, the high-low method, and special transportation industry rates where eligible can help maximize deductions. Employers should ensure compliance with substantiation and reporting requirements, and keep up to date with annual IRS per diem notices.
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