Per Diem and Travel Expenses

By John Ellsworth, Esq May 2nd, 2009

Was Today’s Lunch Deductible?

Away From Home Expenses

A deduction is allowed for ordinary and necessary traveling expenses incurred by a taxpayer while away from home in the conduct of a trade or business ( Code Sec. 162(a)(2); Reg. §1.162-2). This deductions always arise when we are defending individuals and businesses on their IRS tax audits. Individuals are not “away from home” unless their duties require them to be away from the general area of their tax homes for a period substantially longer than an ordinary workday and it is reasonable for them to need to sleep or rest. In some cases, then, travel expenses may be deductible even though the taxpayer is away from home for a period of less than 24 hours.

The costs of the following items are ordinarily deductible, if paid or incurred while a business owner or employee is traveling away from home on business:

  • meals and lodging
  • transportation, including a reasonable amount for baggage, necessary samples and display materials
  • hotel rooms, sample rooms, telephone and fax services
  • public stenographers
  • the costs (including depreciation) of maintaining and operating a car for business purposes

The deduction for the cost of meals and lodging while away from home on business is limited to amounts that are not lavish or extravagant under the circumstances ( Code Sec. 162(a)(2)). The deduction for meals is limited to 50 percent of the total expenses.

Substantiation Requirements

In order to claim any deduction, a taxpayer must be able to prove, if the return is audited, that the expenses were in fact paid or incurred. Small expenses and those which are clearly related to the business may be substantiated by the taxpayer’s statement (we use affidavits in our tax audit defense practice) or by keeping receipts, sales slips, invoices, or canceled checks or other evidence of payments. The following expenses, which are deemed particularly susceptible to abuse, must generally be substantiated by adequate records or sufficient evidence corroborating the taxpayer’s own statement: expenses with respect to travel away from home (including meals and lodging), entertainment expenses, business gifts, and expenses in connection with the use of “listed property” (such as cars, computers and cell phones) ( Code Sec. 274(d)). The expenses must be substantiated as to (1) amount, (2) time and place, and (3) business purpose. For entertainment and gift expenses, the business relationship of the person being entertained or receiving the gift must also be substantiated ( Temp. Reg. §1.274-5T(a)- (c)).

Substantiation by Adequate Records. A contemporaneous log is not required, but a record of the elements of the expense or use of the listed property made at or near the time of the expenditure or use, supported by sufficient documentary evidence, has a high degree of credibility. Adequate accounting generally requires the submission of an account book, expense diary or log, or similar record maintained by the employee and recorded at or near the time of incurrence of the expense. Documentary evidence, such as receipts or paid bills, is not generally required for expenses that are less than $75. However, documentary evidence is required for all lodging expenses ( Reg. §1.274-5(c)(2)(iii)). The employee should also maintain a record of any amounts charged to the employer.

Per Diem Methods for Substantiating Employers’ Meals and Lodging Expenses

A taxpayer must substantiate the amount, time, place, and business purpose of expenses paid or incurred in traveling away from home. Although the taxpayer has the option of keeping the actual records of travel expenses, the IRS has provided per diem allowances under which the amount of away-from-home meals and incidental expenses may be deemed to be substantiated. These per diem allowances eliminate the need for substantiating actual costs ( Rev. Proc. 2007-63). If per diem allowances are used to calculate the deductible amount, the time, place and business purpose of the travel must still be substantiated by adequate records or other evidence.

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This entry was posted on Saturday, May 2nd, 2009 at 3:14 pm and is filed under Avoiding Tax. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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