What steps can employers take to ensure that per diem payments for employee travel are structured to maximize deductibility and minimize nondeductible meal addbacks?
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To ensure that per diem payments for employee travel are structured to maximize deductibility and minimize nondeductible meal addbacks, employers must carefully design their reimbursement arrangements in compliance with the Internal Revenue Code, Treasury Regulations, and IRS guidance. The following steps, based on the most current sources and legal requirements, are recommended:
1. Use an Accountable Plan
Accountable plans are reimbursement or allowance arrangements that require employees to:- Incur expenses while performing job duties,- Substantiate expenses (e.g., with receipts or per diem substantiation) within a reasonable time,- Return any excess reimbursement within a reasonable period.
Amounts paid under an accountable plan are not considered wages and are not subject to income or employment taxes. In contrast, nonaccountable plans (which do not meet these requirements) result in payments being treated as taxable wages, subject to withholding and employment taxes, and are generally not deductible by the employer as business expenses.
2. Use IRS-Approved Per Diem Rates
Employers should use the federal per diem rates published annually by the IRS for lodging, meals, and incidental expenses, or the special rates for the transportation industry or the high-low substantiation method. The per diem rates are deemed substantiated for tax purposes if the arrangement otherwise meets the accountable plan requirements.
- Federal Per Diem Rate: Use the GSA-published rates for the locality of travel.
- High-Low Method: Use the IRS-published high and low rates for high-cost and other localities.
- Transportation Industry: Use the special M&IE rates for transportation workers.
3. Structure Per Diem Payments Properly
- Do not exceed the federal per diem rate: If the per diem allowance exceeds the federal rate, the excess is treated as paid under a nonaccountable plan and is taxable to the employee and nondeductible to the employer.
- Require substantiation: Employees must substantiate the time, place, and business purpose of travel.
- Require return of excess: Employees must return any per diem paid for unsubstantiated travel days.
4. Separate Meal and Incidental Expenses from Lodging
- If only meals and incidental expenses are reimbursed (not lodging), ensure the per diem is paid only for those expenses and not for lodging, unless actual lodging expenses are separately substantiated or paid directly by the employer.
5. Apply the §274(n) Deduction Limitation Correctly
- General Rule: Only 50% of meal and beverage expenses are deductible.
- Exceptions: Certain meals are 100% deductible (e.g., those provided for employee recreational events, or on offshore oil platforms, or for crew on certain vessels). For transportation workers subject to Department of Transportation hours of service, the deductible percentage is 80%.
- Per Diem Allocations: For per diem payments, the meal portion must be identified and only that portion is subject to the 50% (or 80%) limitation. The IRS publishes the meal portion of the high-low per diem rates annually.
6. Avoid Double Dipping
- If a per diem is paid, do not also reimburse actual expenses for the same category (e.g., meals) for the same travel days. Any additional reimbursement is treated as paid under a nonaccountable plan and is taxable.
7. Maintain Adequate Documentation
- Employers must keep records showing the per diem rates used, the substantiation provided by employees (dates, locations, business purpose), and evidence that excess amounts were returned or taxed as wages if not returned.
8. Monitor for Patterns of Abuse
- If the arrangement routinely pays per diems in excess of substantiated expenses without requiring return or wage reporting, the IRS may treat all payments as made under a nonaccountable plan, making them fully taxable and nondeductible.
9. Special Considerations for 2025 and Beyond
- The 50% limitation on meal deductibility remains in effect for 2025 and beyond, except for the specific exceptions noted above. The temporary 100% deduction for restaurant meals expired after 2022.
9. Summary Table of Key Steps
- Adopt an accountable plan for all travel reimbursements.
- Use IRS-approved per diem rates (federal, high-low, or transportation industry).
- Do not pay per diems above the federal rate; treat any excess as taxable wages.
- Require substantiation of time, place, and business purpose.
- Require return of excess per diem for unsubstantiated days.
- Apply the 50% (or 80%) deduction limit to the meal portion of per diems.
- Do not double reimburse for the same expense category.
- Maintain documentation for all per diem payments and substantiation.
- Monitor for abuse to avoid reclassification as a nonaccountable plan.
By following these steps, employers can maximize the deductibility of per diem payments for employee travel and minimize nondeductible meal addbacks, ensuring compliance with the substantiation and limitation rules under the Internal Revenue Code and IRS guidance.
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