by Wayne Davies
Carpe Diem: Seize the per diem method and throw away those receipts!
The mantra of tax record-keeping has remained relentlessly burdensome for decades: “No Receipt, No Deduction.”
But fear not, you who loathe the never-ending climb up the mountain of paperwork required by the U.S. tax code. Many of our most beloved tax rules have exceptions, and such is the case with this one.
You may not know that there are expenses you can legally deduct without a receipt. Here’s one for self-employed folks who travel out-of-town on business. When it comes to deducting your meals on an overnight business trip, you have two options with regard to receipts and record-keeping:
Option 1: You keep your receipt from each meal and simply deduct half the cost of the meal, thus following the “No Receipt, No Deduction” rule.
Option 2: You use the per diem method to determine your meal deduction. For each day of the trip, you are allowed a daily meal allowance, depending on what part of the country you were visiting.
For example, the per diem meal rate for Birmingham, Ala., is $56. For San Francisco, it’s $71. As with Option 1, your actual deduction is 50% of the per diem amount—$28 in Birmingham and $35 in San Fran.
To find the per diem allowances in the United States, go to IRS Publication 1542—Per Diem Rates. If a particular area is not listed, then the allowance is $46 per day.
Take note: There are two very nice benefits to the per diem method.
Benefit 1: You don’t have to keep receipts for your meals. Yep, you can toss ’em. Scouts’ honor.
Benefit 2: It doesn’t matter how much you actually spend on meals, you still get to deduct 50% of the per diem amount. This can result in hundreds of dollars in tax savings for you.
Per diem vs. actual expenses
Say you regularly go to several cities for overnight business trips, traveling about five days each month. These cities all have a per diem rate of $51.
You are frugal. To save both time and money, you prefer to eat at fast food restaurants three times a day. On average, you spend only $20 per day on meals.
But the per diem rate is $51 per day. If you used Option 1, your actual deduction would be $20 x 50%, or $10 per day. With Option 2, you get to deduct $51 x 50%, or $25 per day.
The difference between Option No. 1 and No. 2 is $15 per day. Over the year, this adds up to an extra $900 in deductible meal expenses ($15 per day x 60 days)—even though you didn’t actually spend the $900.
End result: You save $315 in taxes (assuming your combined federal and state income tax rate is 35%). And you can throw away 60 days’ worth of meal receipts.
So you get $315 in tax savings without spending a dime.
One final note: The per diem method is only available to sole proprietors and partners.
Author: Wayne Davies is an Indiana-based tax pro and the author of the "Tax Matters" blog.