the Tax
Court ruled
that the IRC section 274(n) 50% limitationon
deducting food and
beverages applies to nonmeal expenses
when the per diem method is
used, even though the taxpayer
proved the average amount spent on
the nonmeal expenses.
This ailing affects most employers who use
the per diem
method to avoid the strict standards for proving
actual
expenses under IRC section 274(d).
IRC section 162(a)(2) allows a deduction
for traveling
expenses, including meals and lodging while away from
home
in pursuit of a trade or business. IRC section
274(d)
disallows this deduction unless the taxpayer
complies
with stringent substantiation requirements with
respect
to the amount, time and place, and business purpose
of
the expense. Under IRC section 274(n), the deduction
for food and
beverages is generally limited to 50% of
the amount otherwise
allowable.
Con' t
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Revenue Procedure 96-64
Several IRS revenue procedures permit certain
expense
allowances, including per diems, to be treated
as
satisfying the IRC section 274(d) substantiation
requirements
for traveling expenses. This elective method does not
require employees to submit receipts for their actual
expenses.
section 3.01 of Revenue Procedure 96-64 covers two types
of per
diems paid to employees while traveling away from home on
business:
one for lodging, meals, and incidental expenses, and the
other for
meals and incidental expenses (M&IE) only. These per
diems cannot
exceed the estimated actual expenses, nor can they
exceed the
applicable federal per diem rate. The amount deemed
substantiated
is the lesser of the per diem allowance or the
federal rate (sections
4.01 and 4.02 of Revenue Procedure 96-64).
For the transportation
industry, the federal M&IE rate is $36
per day under section
4.04 of Revenue Procedure 96-64.
A per diem is treated as paid for M&IE only if
the employer
separately pays for lodging, based on receipts
submitted by
the employee; if lodging is provided by or directly
paid for
by the employer; if the employee does not incur lodging
expenses; or if the per diem is calculated using the same
basis as the employee's wages, such as hours worked, miles
driven, or pieces produced.
Section 6.05 of Revenue Procedure 96-64 applies the IRC
section 274(n) 50% limitation to per diems. If the per
diem is
for M&IE only, all of the per diem is treated
as for food and
beverages, and therefore subject to the
50% limitation. If the per
diem also includes lodging, the
employer must treat an amount
equal to the federal M&IE
rate as for food and beverages. If a
per diem that includes
lodging is paid at less than the federal
rate, the employer
may elect to treat 40% of the per diem paid as
the federal
M&IE rate. The remaining 60% would therefore be
fully
deductible lodging expense. This election permits a
deduction of 80% (50% x 40% for the M&IE, plus 60% for
the
lodging).
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Fact Pattern
In Boyd, Continental Express, an S corporation, was a long-haul
trucking company, with an average haul of about 1,800 miles.
In 1995-1997, Continental employed about 300 drivers, who were
on the road an average of 25 to 28 days per month. Most drivers
slept in their trucks, except when fatigued or on layover, when
they stayed in a motel. Continental paid $25 per day in wages
plus $30 per night in motel expense for layover, but not for
fatigue. The drivers' travel expenses included meals, occasional
motel rooms, truck parking, showers, laundry, and Federal Express
charges.
Continental used the revenue procedures to substantiate deductions
for its drivers' travel expenses. In addition to $0.25 to $0.32
per mile in wages, Continental paid the drivers a per diem of
$0.09
per mile (or about $31-$32 per day) for travel expenses,
which was
less than the drivers' actual travel expenses.
Therefore, except
for layovers, the drivers were not required to
submit receipts for
travel expenses. Continental's per diem plan
was typical of per
diems in the trucking industry. Finally,
Continental's accounting
system tracked only miles driven, not
days worked.
Continental deducted 80% of the per diem payments by treating
only
40% as subject to the 50% limitation and deducting the
remaining 60%
in full. The 1RS applied the 50% limitation to all
of the per diem
payments. Continental argued that the revenue
procedures were invalid
in requiring all of the per diem to be for
M&IE and in applying the
50% limitation to this amount. The
IRS' approach ignored the nature
of the expenses actually incurred
by the drivers. Continental
submitted the testimony of three
drivers, who said their average
daily nonmeal expenses were $7.61
per day. Continental also claimed
that its per diem on miles
driven was based on competitive reasons.
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=
The Tax Court's Ruling
The Tax Court ruled that the revenue procedures are valid and
Continental is allowed to deduct only 50% of the total per diem
payments. Because Continental's drivers usually slept in their
trucks, the court ruled that Continental did not prove that 60%
of the per diem was for lodging. Citing Beech Trucking [118 TC 428
(2002)], the court pointed out that the revenue procedures are
elective and allowed Continental to avoid maintaining actual
receipts
for each expense incurred by its drivers. Even though
Continental,
unlike Beech, submitted evidence of the average
nonmeal expenses not
otherwise subject to the IRC section 274(n)
50% limitation, the
Tax Court ruled that this evidence was
irrelevant, and did not
allow an additional deduction. To deduct
the nonmeal expense part
of the per diem, Continental would be
required to substantiate all
of the drivers' actual (not average)
travel expenses and not elect
the revenue procedures method.
Taxpayers cannot pick and choose the
best features of both methods
to maximize the difference between
the deduction and the
record-keeping expenses.
'Rough Justice'
Employers paying employees' travel expenses have a choice in
deducting travel expenses: substantiate actual (not average)
expenses, or adopt the revenue procedures method. A combination
of the two approaches is not allowed. The revenue procedures
method greatly simplifies record keeping, but subjects the
entire M&IE per diem to the 50% limitation. The result is "at
least rough justice," the Tax Court noted. For many employers,
the cost of substantiating actual travel expenses would exceed
the additional taxes incurred from this 50% limitation.
The Taxpayer Relief Act of 1997 gradually increases the IRC
section
274(n) deduction for food and beverages from 50% in 1997 to
80% in
2008 for workers in the transportation industry subject to
federal
hours of 1RS rules. The 2004-2005 deduction is 70%.
Included are
workers in air transportation, interstate trucking,
railroads,
and the merchant marine. Continental's drivers would
have been
included. This change to IRC section 274(n) does not
affect workers
in other industries and does not eliminate the
issue in Boyd for
transportation workers. It simply reduces the
difference between
the deductions under the two methods when the
M&IE per diem
includes nonmeal expenses.
SIDEBAR
Employers paying employees' travel expenses have a
choice in
deducting travel expenses: substantiate actual (not
expenses,
or adopt the revenue procedures method.
AUTHOR_AFFILIATION
Peter C. Barton, CPA, JD, is a professor of
accounting, and
Clayton R. Sager, PhD, is an associate professor
of accounting,
both at the University of
Wisconsin-Whitewater.
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