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How to Use Approved Per Diem Rates

The IRS often examines deductible travel expenses through a magnifying glass. As a result, both employers and employees must meet strict recordkeeping requirements or face the consequences. Fortunately, you can obtain some relief by using IRS-approved per diem allowances in lieu of accounting for every expense.

The per diems are actually the allowances approved for travel by United States government employees. However, a business owner cannot use either type of per diem allowance if he or she owns 10% or more of the company.

There are two basic per diem rates. The first is based separately on the employee's travel destination. The second depends on the annual “high-low” rates established each year for certain areas.

Starting point: As long as employees properly account for their business travel expenses, including the cost of meals and lodging, employer-paid reimbursements are tax-free to the employees and deductible by the company. But this can lead to a recordkeeping nightmare. With a per diem allowance, employees do not have to keep receipts for all of their travel expenses. The employer simply pays the government-approved allowance—no muss, no fuss. Employees do not even have to report the payments on their tax return. However, they still must substantiate the time, place and business purpose of their business travel.

In addition to adjusting the allowances for each specific travel destination, the government establishes a flat rate for certain high-cost areas. The list of high-cost areas includes “no-brainers” like New York and San Francisco, but it can also feature lower-visibility locales such as Schenectady, N.Y., and Steamboat Springs, Col. In addition, other areas may be included on the list on a seasonal basis such as Aspen in the winter or Martha's Vineyard in the summer. All locations not listed as high-cost areas automatically fall into the low-cost category.

The IRS recently announced that the per diem for travel in high-cost areas for the 2006 tax year—the new rate may actually be used for expenses incurred after September 30, 2005—is $226 (up from $204 for 2005). The low-cost rate is $141 (up from $129). These are the most significant increases we have seen in years.

To reduce the paperwork burden, you might use the high-low method for employees who travel extensively, especially if they generally are traveling to major cities. On the other hand, you can require other employees to use the specific location method if they frequently travel to low-cost areas. Finally, you can have those employees who travel infrequently keep detailed records of their actual expenses.

Consult with your professional tax advisers for the particulars that apply to your company's situation.

The IRS often examines deductible travel expenses through a magnifying glass. As a result, both employers and employees must meet strict recordkeeping requirements or face the consequences. Fortunately, you can obtain some relief by using IRS-approved per diem allowances in lieu of accounting for every expense.

The per diems are actually the allowances approved for travel by United States government employees. However, a business owner cannot use either type of per diem allowance if he or she owns 10% or more of the company.

There are two basic per diem rates. The first is based separately on the employee's travel destination. The second depends on the annual “high-low” rates established each year for certain areas.

Starting point: As long as employees properly account for their business travel expenses, including the cost of meals and lodging, employer-paid reimbursements are tax-free to the employees and deductible by the company. But this can lead to a recordkeeping nightmare. With a per diem allowance, employees do not have to keep receipts for all of their travel expenses. The employer simply pays the government-approved allowance—no muss, no fuss. Employees do not even have to report the payments on their tax return. However, they still must substantiate the time, place and business purpose of their business travel.

In addition to adjusting the allowances for each specific travel destination, the government establishes a flat rate for certain high-cost areas. The list of high-cost areas includes “no-brainers” like New York and San Francisco, but it can also feature lower-visibility locales such as Schenectady, N.Y., and Steamboat Springs, Col. In addition, other areas may be included on the list on a seasonal basis such as Aspen in the winter or Martha's Vineyard in the summer. All locations not listed as high-cost areas automatically fall into the low-cost category.

The IRS recently announced that the per diem for travel in high-cost areas for the 2006 tax year—the new rate may actually be used for expenses incurred after September 30, 2005—is $226 (up from $204 for 2005). The low-cost rate is $141 (up from $129). These are the most significant increases we have seen in years.

To reduce the paperwork burden, you might use the high-low method for employees who travel extensively, especially if they generally are traveling to major cities. On the other hand, you can require other employees to use the specific location method if they frequently travel to low-cost areas. Finally, you can have those employees who travel infrequently keep detailed records of their actual expenses.

Consult with your professional tax advisers for the particulars that apply to your company's situation.

 

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