Claiming the Per Diem Deduction: Best Practices for Your Business

Traveling for business can help you meet new people, close new business deals, and rack up some serious airline miles and credit card rewards points. But tracking and reimbursing employees for their business travel expenses can be a pain.

One way to simplify the process is by setting per diem rates.

What is per diem?

Per diem is a Latin term that means “for each day." In the context of business travel, it refers to the amount of money employees can spend on their daily travel expenses, such as hotels and meals. It can also cover incidental expenses like dry cleaning services and tips.

Using per diem gives traveling employees flexibility because if they want to upgrade their hotel room or enjoy a more expensive meal than their company wants to pay for, they can get reimbursed for the per diem rate and pay the rest out of pocket.

It also simplifies accounting for businesses because they don't need to collect receipts for every expense or require a cumbersome expense approval process.

Note that per diem doesn't include all travel expenses. For example, it doesn't cover transportation, such as paying for a flight or reimbursing an employee for their miles.

How to set per diem rates

Each year, the US General Services Administration (GSA) publishes a list of standard per diem rates. While these rates were originally intended for federal employees, many businesses use them as a benchmark for setting their own per diem rates.

The GSA's per diem rates are typically broken down into two buckets:

• Lodging
• Meals & Incidental Expenses (M&IE)

Those rates are also broken down by city and by month. The GSA does this because some cities are more expensive than others, and some locations are more popular at certain times of the year, so the per diem rates are adjusted to reflect the amount of money employees will need to stay in the city.

If you don't want to avoid tracking individual city rates, you can use the high-low method instead. Under the high-low method, the IRS establishes an annual flat rate for higher-cost areas. Any areas within the continental US that aren't listed as “high cost" automatically fall into the low-cost category.

You can find the year's per diem rates and more information on the per diem deduction in IRS Publication 463, Travel Gift, and Car Expenses.

You don't have to use the federal per diem rates, but as long as your per diem rates are the same as the government's rates or lower, per diem isn't taxable income for employees. The employee just needs to file an expense report within 60 days of returning from their trip.

If you offer employees a higher rate than the federal per diem rates, the excess amount is taxable income for the employee.

Per diem deduction best practices

Another benefit of per diem payments is that they're tax-deductible for the business but not taxable income to the employee, as long as you properly account for those expenses.

Follow these best practices to ensure you take advantage of every potential tax benefit.

• Clearly outline your travel expense reimbursement policy. You can give employees per diem upfront—either in cash or by assigning them a company credit card. You can also ask employees to pay out of pocket for expenses and reimburse them when they return. Either way, make sure you have an expense reimbursement policy that clearly outlines the types of expenses that aren't covered.
• Establish a per diem rate that is at or below the federal amount. This ensures your employees don't have to pay taxes on travel reimbursements.
• Require employees to submit expense reports. Employees should file expense reports within 60 days of travel. The expense report should include:
  • Date
  • Location
  • Amount
  • Business purpose

Recordkeeping requirements are more relaxed under a per diem plan than under other forms of expense reimbursement plans. But it's still important to keep accurate records of when employees travel for work and how much per diem you provide.