This article was written by Katie Worley, Senior Accountant at The Bonadio Group.
The IRS recently issued Notice 2021-63 to further clarify the 100% deduction for business meals and the per diem allowances. Prior to the recent temporary law change, business meals were subject to a 50% deduction through § 274(n)(2)(D) of the Internal Revenue Code. However, the Consolidated Appropriations Act, enacted in December 2020, provides a special rule where taxpayers can take a temporary 100% deduction for meals incurred after December 31, 2020 and before January 1, 2023.
Notice 2021-63 states taxpayers should reference Section 6.05 of Rev. Proc 2019-48 to determine the appropriate limitation on meal expenses. If an employer chooses to pay the employee a per diem allowance to reimburse for travel expenses instead of the total expenses incurred, “the amount of the expenses that is deemed substantiated for each calendar day is equal to the lesser of the:
- per diem allowance for that day OR
- the amount computed at the federal per diem rate for the locality of travel for that day”.
When calculating this allowance, taxpayers should consider when the employee is traveling away from home and is reimbursed for lodging, meal, and incidental costs. All or part of the total expenses incurred will be deductible depending if the employee is reimbursed for total expenses incurred or is paid on a per diem basis. If the employee is paid for expenses incurred, only food and beverages provided by a restaurant will be 100% deductible. If the employee is given a per diem allowance, only the food and beverage portion attributed to the per diem allowance will be 100% deductible.
Additionally, any expenses incurred greater than the per diem allowance given by the employer or above the federal per diem rate will be included in the employee’s gross income. This amount will be reported as wages or other compensation and is subject to respective withholding tax. Double reimbursement to the employer and the employee is excluded which is also applicable for self-employed individuals. For example, employees receive a per diem allowance during a business trip. During the trip, the employer decides to pay for dinner one night. Only the employer can take the 100% deduction – the employees are unable to do so.
In summary, it is imperative to not only evaluate current reimbursement methods being used by your business, but also maintain appropriate records of expenses to ensure proper recording is being performed.
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