Construction contractors that use the per diem rate for employee travel and expenses can continue to use the 100 percent deduction in 2022. Normally, these expenses are only 50 percent deductible, but thanks to COVID-19 legislation (the Taxpayer Certainty and Disaster Relief Act of 2020), the tax benefits are temporarily higher.
Recent IRS guidance clarified the 100 percent per diem deductibility. To get the most use of this temporary tax benefit, contractors will want to familiarize themselves with qualifying expenses, per diem methods, and ways to maximize the deduction.
Using the Per Diem Rate for Business Meals and Expenses
Per diem has the benefit of requiring much less recordkeeping. Construction contractor employees who travel away from home for work don’t necessarily have to supply detailed receipts and records for the employer to claim the expenses. The per diem rate allows the business to instead pay a simplified, flat rate per day for lodging, meals, and incidentals. Employees then receive a flat rate reimbursement for any work-related travel.
The per diem rate can combine lodging, incidentals, and meal costs or just meal costs alone. Contractors can either pay a combined rate for all lodging, meals, and incidentals based on the locality or just pay a meals per diem alone. There is not a standalone per diem rate for lodging.
When paying the combined per diem, choose one method. Either use:
- The total combined payment is for lodging minus meals and incidentals or
- 60 percent of the payment is for lodging and 40 percent is for meals and incidentals.
Whichever method is chosen, be consistent throughout the year.
Contractors are not required to pay the full federal per diem and may also decide to pay more than the federal minimum; however, in that case, any excess above the federal amount would be taxable income. Also note that transportation costs are not included in per diem and should be treated as either actual expenses or using the standard IRS mileage reimbursement rate.
Employees are still required to submit an expense report to substantiate the time, place, and purpose of the expense. And, per diem rates are non-taxable income to employees except in certain circumstances. Exceptions would include if there were no expense report or if the employer reimbursement is more than the per diem rate.
Although per diem can be accounted for as either taxable wages or a separate company expense, contractors with union employees may not have a choice: the union contract may preclude them from including per diem as taxable wages at all.
For fiscal year 2022 beginning October 1, 2021, the per diem rates are as follows:
- High-cost areas are $296 per day: $222 for lodging and $74 for meals and incidentals
- All other locations are $202 per day: $138 for lodging and $64 for meals and incidentals
These rates are in effect from October 1, 2021 through September 30, 2022.
Per Diem Under IRS Notice 2021-63
The Taxpayer Certainty and Disaster Relief Act of 2020 did allow for a temporary 100 percent tax deduction for business meals but did not clarify whether the per diem allowance would be included. IRS Notice 2021-63 addresses this ambiguity and clarifies that the meal portion of per diem is 100 percent deductible, provided the expense was made at a restaurant or other qualifying establishment.
It’s not just restaurants that qualify for deductible purchases. Any business that prepares and sells food for immediate consumption qualifies. Note that grocery and convenience stores, vending machines, liquor and beer distributors, and other businesses that mostly sell pre-packaged food and other items do not qualify. Meals provided by employers also do not qualify.
Contractors that don’t pay the federal meals per diem can fully deduct the 40 percent per diem allocable to meal expenses.
Getting the Most Out of the 100 Percent Meals Deduction
There are a few ways that contractors can maximize the temporary 100 percent meals deduction for per diem expenses.
One, go back through employee business travel in 2021 and ensure that all qualifying meal expenses are backed up with a completed expense report. A per diem reimbursement is considered taxable to the employee if the expense report is missing or incomplete.
Second, confirm that the per diem method is consistent throughout the year. For example, a contractor should not start the year using the standard high-low rate and then switch to the 40/60 allocation method. The reimbursement method can change from one year to another, but not within the same fiscal year.
Third, review the per diem reimbursement policy. If using the high-low method, the employer’s reimbursement cannot be more than the federal amount or else the balance is taxable income.
Also, keep in mind that many contractors pay less than the federal per diem rate. While the meals expenses are 100 percent deductible, it could help to attract and retain talent to increase the per diem accordingly.
There is also the option to reimburse employees for actual expenses of business travel. The cost of business meals would still be 100 percent deductible in 2021 and 2022; however, more documentation is required. For IRS purposes, individual expenses less than $75 don’t need documentation, but company policy can require it.
Because construction is an industry that typically incurs high per diem costs, the temporary 100 percent meals deduction can mean big tax savings. Know the rules, keep track of employee expense reports, and review company per diem policies. Either in advance of filing 2021 taxes or in preparation for 2022 expenses, the 100 percent meals deduction for business meals and per diem meal expenses can help construction contractors recoup expenses for employee travel.
Jennifer French, CPA, Partner and Team Leader of PBMares’ Construction and Real Estate group, can answer client questions about the 100 percent per diem deduction for meals, as well as other tax planning concerns.