Traveling for Work? How Per Diems Can Help Track Expenses
The worst part of coming home from a business trip is often the expense report. You confront a pile of receipts in a desperate effort to put together a chronology of meetings, tips for taxi drivers and bellhops, lunches on the fly, breath mints after a lunch with too much garlic, screen cleaners for the laptop, etc.
Tracking travel expenses in order to get reimbursed or to deduct them from your taxes can be a huge hassle.
But there’s relief available in the form of a standard allowance, better known as “per diem.”
As a reminder, your travel expenses can be tax-deductible business expenses if they are “ordinary and necessary” expenses of traveling away from your home for your business or job. Those include transportation, lodging, and meals and incidental expenses (M&IE) such as tips.
Related: The Best Cards for Maximizing Your Employees’ Per Diem Meal Spending
Per Diem Advantages
The per diem ("per day") allows you to list a government-determined figure for some or all of those expenses on your expense report, rather than a long accounting of the actual, individual expenses.
The standard per diem rate in effect from Oct. 1, 2018, to Sept. 31, 2019, for travel within the continental US is $195 total (accommodation, meals and incidentals). The rate for just meal and incidental expenses is $60.
In addition, the IRS publishes special rates for more than 400 high-cost locations and even for more expensive travel times, meaning some locations are considered high-cost only during certain times of the year. Here’s a list of the high-cost locations and a searchable map to determine their allowances.
For international travel, the US Department of State establishes per diem rates for all foreign areas, including a maximum rate for lodging and a rate for meals and incidentals.
Using per diems does not mean that you don’t have to keep any records or documentation at all. You still must prepare an expense report, showing the date, place, business purpose and business relationships that led to the expenses. If you use a per diem, list the allowance amount in the expense report instead of the actual expense. And you still must have receipts for items not covered by the per diem.
(The IRS defines business travel as travel for work that requires you to be away from your tax home for longer than an ordinary work day. Expenses incurred for a temporary work assignment away from your home for less than one year can also qualify as tax-deductible travel expenses.)
What Are Typical Tax-Deductible Business Expenses?
Typical tax-deductible business travel expenses include:
- Travel by airplane, train, bus or car between your home and your business destination. However, if you travel on a free ticket as part of a frequent traveler or similar program, your cost is zero. Points-and-miles fans should note that you cannot deduct the estimated value of the miles you used.
- Fares for taxis and Uber/Lyft or similar transport between the airport or train station and your hotel, the hotel and the work location, and from one customer to another, or from one place of business to another. If you are using a car, you can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking fees.
- Shipping of baggage and work-related material, such as samples, between your regular and temporary work locations.
- Meals, although business meals can only be deducted at 50% of the unreimbursed cost.
- Lodging, including stays at Airbnb, can be deducted. However, if you are an independent contractor, you cannot use per diem. You would have to deduct the actual lodging expense. Again, if you are using points for a free hotel stay, this is not tax-deductible.
- Incidentals such as tips, which is capped at $5 per day.
Who Can Use Per Diem Rates?
Per diem rates can be used to reimburse employees for travel expenses. Per diem rates are available for meals and incidentals and also for lodging. Companies usually reimburse their employees for these travel expenses. Previously, as an employee, you could deduct any unreimbursed expense. The new tax law, however, eliminated deductions for unreimbursed employee expenses for the tax years 2018 through 2025. This means only businesses and the self-employed can now deduct those expenses.
An employer can use a per diem rate to reimburse employees for combined lodging and meal costs, or for meal costs alone. As long as those per diem payments do not exceed the federal per diem rate and the employee provides an expense report, they are not taxable income. In general, expenses have to be “substantiated” with actual receipts or are “deemed substantiated” with a per diem rate no higher than the federal per diem rate. An unsubstantiated reimbursement higher than the federal per diem rate is considered taxable income.
Self-employed people such as travel bloggers, copywriters, magazine editors, and others who travel often for work, can use per diems to deduct meals and incidental expenses from their taxes. They cannot use the per diem for lodging. It must be recorded as actual expenses with receipts, not per diem.
As an independent contractor or self-employed freelancer you are basically both the employer AND the employee. That does not let you off the hook, if you want to use the per diem for establishing tax-deductible expenses, for tracking certain expenses and preparing an expense report with dates, places, business purpose, etc. If you have your own company (such as an S Corp), then you should deduct the expenses directly from the business.
Temporary Nomad Versus Digital Nomad
Temporary digital nomads in global rotation programs like Remote Year might also qualify to deduct travel expenses and, therefore, to use per diems. However, full digital nomads without a home wouldn’t.
As an expatriate with a fixed home abroad, you can deduct expenses incurred by business travel. For example, if you live and work in Madrid and pay taxes to Spain, you can deduct travel expenses on your US tax return for work that requires you to be away from Madrid.
Expats on short-term assignments may receive per diem payments for the duration of the stay. If the intended stay is one year or more, however, the expat is living at the assigned location and cannot deduct assignment-related travel expenses.
If you have more than one place where you live and work, then, generally, the place where you spend more time, or where most of your revenue is generated, is considered your tax home. For more nomadic expats, however, the key is “travel away from your home.” If you don’t have a home that you travel from and back to, you likely won’t be able to deduct your travel expenses.
Do’s and Don’ts of Using Per Diems for Business Travel
Using per diem rates can have advantages in many situations, if used correctly. However, per diems are not free money or tax deductions without any paperwork. If you are using per diems for business travel expenses, keep the following in mind:
- Only use per diems that do not exceed the location-specific federal rate to avoid tax issues.
- Keep track of date, place, business purpose and business relationship with any party involved for your expense report. You need those records even when using per diem rates.
- Prepare an expense report.
- Check the per diem rates for your destination and compare with your expected actual cost to see which one is more beneficial.
- Forget to keep receipts of other expenses. Per diems only cover meals and incidentals and a maximum lodging rate. (Lodging is not covered by a per diem for the self-employed.) Transportation, shipping or other business-related expenses must be claimed separately, supported by receipts.
- Deduct travel paid for with miles, points, etc. Those are not tax-deductible.
- Combine lodging and M&IE rates. You cannot use an “unused” portion of one allowance and apply it to the other. For example, if your hotel is more expensive than the maximum lodging rate but your M&I expenses are below, you cannot apply part of the M&IE to your hotel bill.
Alexander Bachuwa is a New York attorney who focuses on consumer and international dispute resolution. For more information, visit the Bachuwa Law website or The Points Of Life, his travel blog. With additional reporting by Vincenzo Villamena, an expat tax CPA based in Medellin, Colombia who travels the world advising other expats on how to optimize their tax situation.