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IRS Scrutinizes Per Diem Reimbursements
Despite
the economic slowdown, business travel and associated costs remain a
significant expenditure for many contractors. This is especially
true for firms with multi-state operations or highly specialized firms whose
particular skills take them to project sites across the country.
Those firms whose employees work away from home on longer cycle projects
should be aware that the Internal Revenue Service recently has placed
increased emphasis on lodging reimbursements being partially non-deductible
as meal expenses.
Under current rules, the IRS allocates 40 percent of per diem reimbursements
for meals. For tax purposes, the Internal Revenue Code provides
that only 50 percent of meal expenses are deductible.
IRS Remains Intractable
For many years, the construction industry has argued that if the per diem
reimbursement is specifically stated as a lodging reimbursement only and is
less than or equal to 60 percent of the federal per diem rate, then no
portion of the reimbursement should be allocated to
meals. Unfortunately, the IRS has not altered its stance. (Beech
Trucking; Rev. Proc. 2001-47 Section 6.05(3))
In fact, the IRS has begun to more closely scrutinize this 40 percent
allocation, especially for contractors who pay significant reimbursements to
away-from-home employees.
One way that contractors can address this issue is by establishing direct
accountable reimbursement plans. For example, it might be wise for
contractors to establish accounts that enable direct reimbursement to a
preferred hotel chain, thereby eliminating the need for the per diem
reimbursement to the employee at the federal rate.
Not only will this satisfy IRS scrutiny, but it also will be advantageous if
meals are typically less than 40 percent of per diem expenses. In
these circumstances, a smaller portion of the firm’s expenses will be
classified as meals, which are only 50 percent deductible. The
savings may be substantial for any long-term project that requires crews to
be away from home for an extended period.
The downside, however, is that this direct reimbursement option provides less
flexibility for employees in choosing where they stay or how they spend their
per diem on the road.
Effect on Bidding
Furthermore, contractors must also factor in the impact of per diem
reimbursements when bidding for long-term, labor-intensive projects requiring
significant travel. In bidding these jobs, contractors should
assume that a full 40 percent of the per diem travel expenses will fall under
the 50 percent non-deductible rule.
Any bids should reflect the likelihood that firms will be required to pay tax
on the disallowed deduction. Failure to do so could result in
additional taxation and even penalties that might negate an otherwise healthy
margin on the project.
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