What documentation or substantiation is required to support the deductibility of per diem meal expenses for employees, and how can businesses avoid disallowed deductions?

To support the deductibility of per diem meal expenses for employees, businesses must comply with specific substantiation and documentation requirements set forth in the Internal Revenue Code, Treasury Regulations, and IRS guidance. Failure to meet these requirements can result in the disallowance of deductions for meal expenses. Below is a comprehensive explanation of the requirements and best practices to avoid disallowed deductions.

1. General Substantiation Requirements for Meal Expenses

Section 274(d) of the Internal Revenue Code 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 person receiving the benefit.

Treasury Regulation § 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- Any other expenditure of $75 or more (except for transportation charges if documentary evidence is not readily available).

For meal expenses, the substantiation must include:- The amount,- The date,- The place,- The business purpose, and- The business relationship.

2. Per Diem Substantiation Method

The IRS allows the use of per diem rates to substantiate the amount of meal and incidental expenses (M&IE) in lieu of actual receipts, provided certain conditions are met. This is outlined in Rev. Proc. 2019-48 and its predecessors.

Key Requirements:

• Business Connection: The travel must be business-related and require the employee to be away from their tax home overnight or long enough to require rest.
• Per Diem Rate: The per diem allowance must not exceed the applicable federal per diem rate for the locality of travel (as set by the GSA for CONUS, or by the Department of Defense/State for OCONUS).
• Accountable Plan: The arrangement must be an accountable plan, which requires:
• Substantiation of the time, place, and business purpose of the travel within a reasonable period,
• Return of any excess reimbursement within a reasonable period.

What Must Be Documented:

• Time: Dates of departure and return, and number of days spent on business.
• Place: The locality of travel (city, town, or area).
• Business Purpose: The reason for the travel and how it relates to the business.
• Business Relationship: If meals involve others, the relationship to the business.

Note: While receipts for meals are not required when using the per diem method, the business must still maintain records substantiating the time, place, and business purpose of the travel.

3. Documentation Practices

Acceptable documentation includes:- Expense reports or logs showing the dates, locations, and business purpose of travel,- Itineraries, meeting agendas, or email confirmations supporting the business nature of the trip,- For per diem, a record of the per diem rate used and the number of days claimed,- For accountable plans, evidence that excess reimbursements were returned.

Digital tools (such as Concur or Expensify) can be used to track and store this information, but the records must be accessible and complete in the event of an IRS audit.

4. Avoiding Disallowed Deductions

To avoid disallowed deductions:- Use an Accountable Plan: Ensure your reimbursement arrangement meets the requirements of an accountable plan (business connection, substantiation, return of excess).- Do Not Exceed Federal Rates: Reimburse at or below the federal per diem rates for the locality of travel. If you pay more, the excess is treated as compensation and is subject to income and payroll taxes.- Timely Substantiation: Require employees to submit expense reports with the required details (time, place, business purpose) within a reasonable period (typically 60 days after the expense is incurred).- Return of Excess: Require employees to return any excess reimbursement within a reasonable period (typically 120 days).- Retain Records: Keep all supporting documentation for at least three years after the date the tax return is filed.

If the arrangement is not accountable (e.g., no substantiation or no return of excess), all payments are treated as taxable wages to the employee, and the employer cannot deduct the expenses as travel expenses but only as compensation.

5. Special Considerations

• Meals Must Not Be Lavish or Extravagant: Only reasonable meal expenses are deductible.
• Taxpayer or Employee Must Be Present: The taxpayer or an employee must be present at the meal.
• 50% Limitation: Generally, only 50% of the per diem meal expense is deductible, unless an exception applies (e.g., meals treated as compensation, meals for certain employee recreational events, or meals provided to the general public).
• No Double Dipping: If a per diem is used, no additional deduction is allowed for actual meal expenses for the same travel days.

6. Summary Table of Required Elements for Per Diem Meal Substantiation

7. Citations and Authority

• IRC § 274(d): Substantiation required for travel expenses.
• Treas. Reg. § 1.274-5(c), (f), (g): Adequate records, documentary evidence, and per diem/mileage allowance rules.
• Rev. Proc. 2019-48: Rules for per diem substantiation and accountable plans.
• Publication 463: IRS guidance on travel, gift, and car expenses.
• 26 CFR 1.274-12: 50% limitation and exceptions for meal expenses.
• IRS Publication 1542: How per diem rates work for travel expenses.

8. Conclusion

To deduct per diem meal expenses for employees:- Use an accountable plan,- Reimburse at or below the federal per diem rate,- Require and retain documentation of the time, place, business purpose, and business relationship,- Require timely substantiation and return of excess,- Retain records for at least three years.

By following these substantiation and documentation requirements, businesses can ensure that per diem meal expense deductions are allowed and avoid disallowance by the IRS.