If your employer reimburses you for your expenses using a per diem or a car allowance, you can generally use the allowance as proof for the amount of your expenses. A per diem or car allowance satisfies the adequate accounting requirements for the amount of your expenses only if all four of the following conditions apply.
Your employer reasonably limits payments of your expenses to those that are ordinary and necessary in the conduct of the trade or business.
The allowance is similar in form to and not more than the federal rate (defined below).
You prove the time (dates), place, and business purpose of your expenses to your employer (as explained in Table 4) within a reasonable period of time.
You are not related to your employer (as defined under Standard Meal Allowance in chapter 1). If you are related to your employer, you must be able to prove your expenses to the IRS even if you have already adequately accounted to your employer and returned any excess reimbursement.
If the IRS finds that an employer's travel allowance practices are not based on reasonably accurate estimates of travel costs (including recognition of cost differences in different areas for per diem amounts), you will not be considered to have accounted to your employer. In this case, you must be able to prove your expenses to the IRS.
The federal rate. The federal rate can be figured using any one of the following methods.
For per diem amounts:
The regular federal per diem rate.
The standard meal allowance.
The high-low rate.
For car expenses:
A fixed and variable rate (FAVR).
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For per diem amounts, use the rate in effect for the area where you stop for sleep or rest. |
Regular federal per diem rate. The regular federal per diem rate is the highest amount that the federal government will pay to its employees for lodging, meals, and incidental expenses (or meals and incidental expenses only) while they are traveling away from home in a particular area. The rates are different for different locations. Your employer should have these rates available. (Employers can get Publication 1542, which gives the rates in the continental United States for the current year.)
The standard meal allowance. The standard meal allowance (discussed in chapter 1) is the federal rate for meals and incidental expenses (M&IE). The rate for most small localities in the United States is $30 a day from January 1, 2003, through September 30, 2003, and $31 a day from October 31, 2003, through December 31, 2003. Most major cities and many other localities qualify for higher rates. The rates for all localities within the continental United States are listed in Publication 1542. You can also find this information on the Internet at Domestic Per Diem Rates.
You receive an allowance only for meals and incidental expenses when your employer does one of the following.
Provides you with lodging (furnishes it in kind).
Reimburses you, based on your receipts, for the actual cost of your lodging.
Pays the hotel, motel, etc., directly for your lodging.
Does not have a reasonable belief that you had (or will have) lodging expenses, such as when you stay with friends or relatives or sleep in the cab of your truck.
Figures the allowance on a basis similar to that used in computing your compensation, such as number of hours worked or miles traveled.
High-low rate. This is a simplified method of computing the federal per diem rate for travel within the continental United States. It eliminates the need to keep a current list of the per diem rate for each city.
Under the high-low method, the per diem amount for travel during January through October of 2003 is $204 (including $45 for M&IE) for certain high-cost locations. All other areas have a per diem amount of $125 (including $35 for M&IE). (Employers can get Publication 1542 (Revised February 2003), which gives the areas eligible for the $204 per diem amount under the high-low method for all or part of this period.)
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Effective November 1, 2003, the per diem rate for certain high-cost locations increased to $207 (including $46 for M&IE). The rate for all other locations increased to $126 (including $36 for M&IE). However, an employer can continue to use the lower rates described in the preceding paragraph for the remainder of 2003 if those rates and locations are used consistently during November and December for all employees. Employers who did not use the high-low method during the first 10 months of 2003 cannot begin to use it before 2004. See Revenue Procedure 2003-80 for more information. |
Prorating the standard meal allowance on partial days of travel. The standard meal allowance is for a full 24-hour day of travel. If you travel for part of a day, such as on the days you depart and return, you must prorate the full-day M&IE rate. This rule also applies if your employer uses the regular federal per diem rate or the high-low rate.
You can use either of the following methods to figure the federal M&IE for that day.
Method 1:
For the day you depart, add ¾ of the standard meal allowance amount for that day.
For the day you return, add ¾ of the standard meal allowance amount for the preceding day.
Method 2: Prorate the standard meal allowance using any method that you consistently apply and that is in accordance with reasonable business practice. For example, an employer can treat 2 full days of per diem (that includes M&IE) paid for travel away from home from 9 a.m. of one day to 5 p.m. of the next day as being no more than the federal rate. This is true even though a federal employee would be limited to a reimbursement of M&IE for only 1½ days of the federal M&IE rate.
The standard mileage rate. This is a set rate per mile that you can use to compute your deductible car expenses. For 2003, the standard mileage rate is 36 cents a mile for all business miles. This rate is adjusted periodically.
Fixed and variable rate (FAVR). This is an allowance your employer may use to reimburse your car expenses. Under this method, your employer pays an allowance that includes a combination of payments covering fixed and variable costs, such as a cents-per-mile rate to cover your variable operating costs (such as gas, oil, etc.) plus a flat amount to cover your fixed costs (such as depreciation (or lease payments), insurance, etc.). If your employer chooses to use this method, your employer will request the necessary records from you.
Reporting your expenses with a per diem or car allowance. If your reimbursement is in the form of an allowance received under an accountable plan, the following two facts affect your reporting.
The federal rate.
Whether the allowance or your actual expenses were more than the federal rate.
The following discussions explain where to report your expenses depending upon how the amount of your allowance compares to the federal rate.
Allowance LESS than or EQUAL to the federal rate. If your allowance is less than or equal to the federal rate, the allowance will not be included in box 1 of your Form W-2. You do not need to report the related expenses or the allowance on your return if your expenses are equal to or less than the allowance.
However, if your actual expenses are more than your allowance, you can complete Form 2106 and deduct the excess amount on Schedule A (Form 1040). If you are using actual expenses, you must be able to prove to the IRS the total amount of your expenses and reimbursements for the entire year. If you are using the standard meal allowance or the standard mileage rate, you do not have to prove that amount.
Example 1. In April, Jeremy takes a 2-day business trip to Denver. The federal rate for Denver is $158 per day. As required by his employer's accountable plan, he accounts for the time (dates), place, and business purpose of the trip. His employer reimburses him $158 a day ($316 total) for living expenses. Jeremy's living expenses in Denver are not more than $158 a day.
Jeremy's employer does not include any of the reimbursement on his Form W-2 and Jeremy does not deduct the expenses on his return.
Example 2. In June, Matt takes a 2-day business trip to Boston. Matt's employer uses the high-low method to reimburse employees. Since Boston is a high-cost area, Matt is given an advance of $204 a day ($408 total) for his lodging, meals, and incidental expenses. Matt's actual expenses totaled $550.
Since Matt's $550 of expenses are more than his $408 advance, he includes the excess expenses when he itemizes his deductions. Matt completes Form 2106 (showing all of his expenses and reimbursements). He must also allocate his reimbursement between his meals and other expenses as discussed under Completing Forms 2106 and 2106-EZ.
Example 3. Nicole drives 10,000 miles a year for business. Under her employer's accountable plan, she accounts for the time (dates), place, and business purpose of each trip. Her employer pays her a mileage allowance of 20 cents a mile.
Since Nicole's $3,600 expenses computed under the standard mileage rate (10,000 miles × 36 cents) are more than her $2,000 reimbursement (10,000 miles × 20 cents), she itemizes her deductions to claim the excess expenses. Nicole completes Form 2106 (showing all of her expenses and reimbursements) and enters $1,600 ($3,600 - $2,000) as an itemized deduction.
Allowance MORE than the federal rate. If your allowance is more than the federal rate, your employer must include the allowance amount up to the federal rate in box 12 of your Form W-2. This amount is not taxable. However, the excess allowance will be included in box 1 of your Form W-2. You must report this part of your allowance as if it were wage income.
If your actual expenses are less than or equal to the federal rate, you do not complete Form 2106 or claim any of your expenses on your return.
However, if your actual expenses are more than the federal rate, you can complete Form 2106 and deduct those excess expenses. You must report on Form 2106 your reimbursements up to the federal rate (as shown in box 12 of your Form W-2) and all your expenses. You should be able to prove these amounts to the IRS.
Example 1. Laura lives and works in Austin. Her employer sent her to Albuquerque for 2 days on business. Laura's employer paid the hotel directly for her lodging and reimbursed Laura $50 a day ($100 total) for meals and incidental expenses. Laura's actual meal expenses were not more than the federal rate for Albuquerque, which is $42 per day.
Her employer included the $16 that was more than the federal rate (($50 - $42) × 2) in box 1 of Laura's Form W-2. Her employer shows $84 ($42 a day × 2) in box 12 of her Form W-2. This amount is not included in Laura's income. Laura does not have to complete Form 2106; however, she must include the $16 in her gross income as wages (by reporting the total amount shown in box 1 of her Form W-2).
Example 2. Joe also lives in Austin and works for the same employer as Laura. In May the employer sent Joe to San Diego for 4 days and paid the hotel directly for Joe's hotel bill. The employer reimbursed Joe $60 a day for his meals and incidental expenses. The federal rate for San Diego is $50 a day.
Joe can prove that his actual meal expenses totaled $325. His employer's accountable plan will not pay more than $60 a day for travel to San Diego, so Joe does not give his employer the records that prove that he actually spent $325. However, he does account for the time, place, and business purpose of the trip. This is Joe's only business trip this year.
Joe was reimbursed $240 ($60 × 4 days), which is $40 more than the federal rate of $200 ($50 × 4 days). The employer includes the $40 as income on Joe's Form W-2 in box 1. The employer also enters $200 in box 12 of Joe's Form W-2.
Joe completes Form 2106 to figure his deductible expenses. He enters the total of his actual expenses for the year ($325) on Form 2106. He also enters the reimbursements that were not included in his income ($200). His total deductible expense, before the 50% limit, is $125. After he figures the 50% limit on his unreimbursed meals and entertainment, he will include the balance, $63, as an itemized deduction.
Example 3. Debbie drives 10,000 miles for business. Under her employer's accountable plan, she gets reimbursed 38 cents a mile, which is 2 cents a mile more than the standard mileage rate.
Debbie's employer must include the reimbursement amount up to the standard mileage rate, $3,600 (10,000 miles × 36 cents), in box 12 of her Form W-2. That amount is not taxable. Her employer must also include $200 (10,000 miles × 2 cents) in box 1 of her Form W-2. This is the reimbursement that is more than the standard mileage rate.
If Debbie's expenses are equal to or less than the standard mileage rate, she would not complete Form 2106. If her expenses are more than the standard mileage rate, she would complete Form 2106 and report her total expenses and reimbursement (shown in box 12 of her Form W-2). She would then claim the excess expenses as an itemized deduction.
Information courtesy of the Internal Revenue Service.
