The IRS has updated its guidance to reflect changes made by the Tax Cuts and Jobs Act (TCJA) regarding the rules for determining the amount of an employee’s ordinary and necessary business expenses for lodging, meals, and incidental expenses while traveling away from home. Specifically, it sets out the rules for using a per diem rate to substantiate lodging, meal and incidental expenses of an employee, or reimbursed meal and incidental expenses (M&IE) only.
Note that employees are not required to use the per diem rates. They may substantiate actual allowable expenses. However, in order to deduct actual expenses, the employee must keep adequate records or provide other acceptable evidence.
IRC §162(a) allows a deduction for ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including expenses for travel away from home. Under IRC §262, a taxpayer may not deduct personal travel or living expenses.
IRC §274(n) generally limits the amount allowable as a deduction under §162 for any expense for food or beverages to 50 percent of the otherwise allowable amount. For an individual during, or incident to, a period of duty subject to the hours of service limitations of the Department of Transportation, IRC §274(n)(3) provides that, for taxable years beginning in 2008 or thereafter, the deductible percentage for these expenses is 80 percent.
To deduct expenses for travel away from home, a taxpayer must substantiate the expenses under IRC §274(d), which also authorizes the Secretary of the Treasury or his delegate to prescribe by regulation that some or all of the substantiation requirements do not apply to an expense that does not exceed a particular amount.
Amendments made by the TCJA temporarily suspend all miscellaneous itemized deductions that are subject to the two percent of adjusted gross income floor for tax years year beginning after December 31, 2017, and before January 1, 2026 (suspension period). Such miscellaneous expenses include unreimbursed employee travel expenses.
The TCJA also amended IRC §274(a) to disallow the deduction for entertainment expenses. For expenses incurred after December 31, 2017, businesses can no longer deduct expenses related to entertainment, amusement, or recreation. Businesses may continue to deduct 50 percent of meal expenses under IRC §274(n)(1).
If you have any questions regarding the updates to the per diem rates, please contact a member of the Crosslin tax team. We appreciate your business and are always happy to answer any questions.