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Per-diem allowances: Use different strokes for different folks

by on
in Small Business Tax,Small Business Tax Deduction Strategies

Uncle Sam often examines deductible travel expenses through a magnifying glass. So both employers and employees must meet strict recordkeeping rules—or face the consequences.

Fortunately, you can take a shortcut. Use IRS-approved per-diem allowance rates in lieu of accounting for every bagel and cab ride from an employee's business trip. The per-diem reimbursements are tax-free to employees up to the government-approved levels. And your company can deduct the reimbursement payments, subject to the 50 percent limit for meals.

Two basic per-diem rates are at your disposal. The first is based on the particular area in the continental United States where the employee is traveling. The second identifies each city as either a "high-cost" or "low-cost" area, then sets flat per-diem allowances for both options.

Choose most-favorable method

But here's one thing most people don't realize: Nothing says you have to use the same method for all employees. So you can use the per-city method for Employee A and the "high/low" method for Employee B. Choose whichever provides better results.

Note: If you're a business owner wondering which method to use for yourself, forget about it. You can't use either type of per-diem allowance if you own 10 percent or more of the company.

Why use per diems?

As long as your employees properly account for their actual business travel expenses, including meals and lodging, employer-paid reimbursements are tax-free to the employees. Plus, your company can deduct the reimbursement payments, subject to the 50 percent limit for meals.

The problem: Tracking all those travel receipts can be a recordkeeping nightmare.

But with a per-diem allowance, employees don't have to keep receipts for every expense. Your company simply pays the government-approved allowance—no muss, no fuss. Employees don't even have to report the payments on their tax return. But they still must substantiate the time, place and business purpose of their business travel. (See box below.)

Which rate for which employee?

As stated earlier, the IRS lets you decide between using a "per city" per-diem rate or the "high/low" rate.

Per-city rate: The Government Services Administration (GSA) updates the regional per-diem rates each year. Find an interactive map that shows all city-specific rates for lodging, meals and incidentals at www.gsa.gov/perdiem.

High/low rate: The GSA also issues an annual list of "high-cost" areas. Any locality that isn't considered "high-cost" is subject to the "low-cost" per-diem rate.

The list of high-cost areas includes no-brainers like New York and Chicago. But it can also feature locales such as Traverse City, Mich. And other areas may be included on the list on a seasonal basis, such as Vail and Aspen in the winter.

Through Oct. 31, 2004, the per-diem rate for travel in high-cost areas is $207 ($161 for lodging and $46 for meals and incidentals). The low-cost rate is $126 ($90 for lodging and $36 for meals and incidentals).

Advice: To reduce the paperwork burden, you'll probably do best using the high/low method for employees who travel extensively, especially if they typically travel to major cities.

On the flip side, you can require employees to use the specific location method if they frequently travel to low-cost areas. Or you can require employees who travel infrequently to keep detailed records of their actual expenses.

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