Are employers required to allocate a portion of a hotel per diem to meals for income reporting if the per diem paid is less than the GSA hotel rate in that region?
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Based on the sources, when an employer pays a per diem allowance for lodging, meals, and incidental expenses, the tax treatment and reporting requirements depend on whether the per diem is equal to, less than, or greater than the applicable federal per diem rate for the locality (as set by the GSA for CONUS travel).
1. Key Points
- Per Diem Allowance Structure:
- The federal per diem rate is split into two components: lodging, and meals & incidental expenses (M&IE).
- Employers may pay a per diem for lodging, meals, and incidentals, or for meals and incidentals only.
- If the Per Diem Paid is Less Than the Federal Rate:
- If the per diem allowance paid is less than the federal per diem rate for the locality, the employer must allocate a portion of the per diem to meals for income reporting and deduction purposes.
- Specifically, the employer must treat as an expense for food and beverages either:
- (a) the federal M&IE rate for the locality of travel for each day or partial day, or
- (b) if less, the amount of the allowance paid.
- Alternatively, the employer may treat 40% of the allowance as an expense for food and beverages.
- Income Reporting and Deduction:
- The portion of the per diem allocated to meals (using the above method) is subject to the 50% deduction limitation under IRC §274(n), unless an exception applies (such as for certain transportation workers, who may be eligible for an 80% deduction).
- The remainder of the per diem is treated as lodging and/or incidental expenses.
- Example from IRS Guidance:
- If an employer pays a per diem allowance for lodging, meals, and incidentals at a rate less than the federal per diem rate, the employer must allocate the per diem between meals and lodging for reporting and deduction purposes, as described above.
- No Reporting if Per Diem is at or Below Federal Rate and Accounted For:
- If the per diem is at or below the federal rate and the employee accounts for time, place, and business purpose, and returns any excess, there is no income inclusion or special allocation required for reporting purposes.
2. Conclusion
Yes, if the per diem paid is less than the GSA (federal) hotel rate in that region, the employer is required to allocate a portion of the per diem to meals for income reporting and deduction purposes. The allocation should be the lesser of the federal M&IE rate for the locality or the amount of the per diem, or alternatively, 40% of the per diem may be treated as meals. This allocation is necessary to properly apply the 50% deduction limitation on meals and to ensure correct income reporting.
If you need a step-by-step example or further clarification on a specific scenario, please provide the per diem amounts and the federal rates for the locality in question.
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