Keep Those Receipts: IRS Guidance on Per Diem Expense Reimbursement

Employers who routinely pay per diem allowances in excess of the federal per diem rates need to track the amount of expense reimbursement allowances paid to employees on a per diem basis, according to guidance issued last week by the Internal Revenue Service (IRS). Generally, amounts employers pay employees to reimburse them for substantiated business expenses are not subject to income or employment tax, however, if employers do not track the allowances and do not require employees to substantiate or repay excess amounts and include excess amounts in the employee’s income and wages, the entire amount of the expense allowance is subject to income and employment tax.


Advertisement



A Better Budgeting and Planning Solution is here.

Microsoft® Forecaster is an affordable way to customize your budgeting and planning to give you the control you need to manage your business' performance. As soon as you enter a number, it's available for analysis, allowing you to see how it impacts revenue and costs. This streamlined budgeting and planning solution helps decrease the chance for errors and miscommunication. And with Microsoft Forecaster, changes are easy to make. Even last-minute ones.


Visit www.microsoft.com/forecaster for more information.


Revenue Ruling 2006-56 became effective immediately upon being issued. IRS agents have been instructed not to apply the results of the revenue ruling for taxable periods ending on or before December 31, 2006, in order to allow employers to adjust their systems so that excess allowances can be tracked and accurately accounted for. Expense reimbursements for meals and other incidentals associated with business travel that do not exceed the federal per diem rates do not have to be substantiated, under the ruling.

According to the ruling, a per diem allowance arrangement that fails to track excess amounts and does not account for unsubstantiated amounts that are not repaid as part of the employee’s wages, constitutes a pattern of abuse of tax-exempt expense reimbursement rules. Because such arrangements have been determined to be abusive, all expense allowances, not just the excess amounts paid under such an arrangement, are subject to income tax and employment tax.

The federal per diem expense allowance rates for business travel away from home within the continental U.S. between October 1, 2005, and January 1, 2008, are detailed in Publication 1542. Per diem rates for travel within the continental U.S. can also be found on the General Services Administration (GSA) web site under Per Diem. The Department of Defense (DoD) provides per diem rates for both the U.S., including Alaska, Hawaii, and U.S. territories and possessions and foreign destinations. According to the U.S. Department of State (DoS), “Maximum rates of per diem allowances for travel in foreign areas are established by the Secretary of State and apply to all U.S. Government employees and contractors.” Revenue ruling 2006-56 does not appear to directly address the issue of reimbursement of expenses related to travel outside the U.S., but it is probably wise to assume it does. As of press time, the IRS did not respond to inquiries regarding foreign per diem rates.

You may like these other stories...

Steve Jobs. Sergey Brin. Mark Zuckerberg. Each of these individuals, and their companies, are celebrated as changing the face of the technology. They all followed a similar path to success: excelling at one thing and...
Read more articles by Sally Glick here.While reading a recent article titled, "Bondage to Busyness," by Alan Morinis, I was struck by his reminder regarding how stressed and pressured we all are today. Our...
To assist firm leaders in making key decisions for the future, BKR International, one of the top 10 global accounting associations. recently put together a list of the five priorities managing partners must address...

Already a member? log in here.

Upcoming CPE Webinars

Sep 24
In this jam-packed presentation Excel expert David Ringstrom, CPA will give you a crash-course in creating spreadsheet-based dashboards. A dashboard condenses large amounts of data into a compact space, yet enables the end user to easily drill down into details when warranted.
Sep 30
This webcast will include discussions of important issues in SSARS No. 19 and the current status of proposed changes by the Accounting and Review Services Committee in these statements.
Oct 21
Kristen Rampe will share how to speak and write more effectively by understanding your own and your audience's communication style.
Oct 23
Amber Setter will show the value of leadership assessments as tools for individual and organizational leadership development initiatives.