Diem Nonmeal Expenses Subject to 50% Limitation
Peter C. Barton and Clayton R. Sager
2005 - In Boyd [122 TC No. 18 (2004)], the Tax Court
ruled that the IRC section 274(n) 50% limitation on deducting
food and beverages applies to nonmeal expenses when the per
diem method is used, even though the taxpayer proved the average
amount spent on the nonmeal expenses. This ruling affects
most employers who use the per diem method to avoid the strict
standards for proving actual expenses under IRC section 274(d).
section 162(a)(2) allows a deduction for traveling expenses,
including meals and lodging while away from home in pursuit
of a trade or business. IRC section 274(d) disallows this
deduction unless the taxpayer complies with stringent substantiation
requirements with respect to the amount, time and place,
and business purpose of the expense. Under IRC section 274(n),
the deduction for food and beverages is generally limited
to 50% of the amount otherwise allowable.
IRS revenue procedures permit certain expense allowances,
including per diems, to be treated as satisfying the IRC
section 274(d) substantiation requirements for traveling
expenses. This elective method does not require employees
to submit receipts for their actual expenses.
Section 3.01 of Revenue Procedure 96-64 covers two types
of per diems paid to employees while traveling away from
home on business: one for lodging, meals, and incidental
expenses, and the other for meals and incidental expenses
(M&IE) only. These per diems cannot exceed the estimated
actual expenses, nor can they exceed the applicable federal
per diem rate. The amount deemed substantiated is the lesser
of the per diem allowance or the federal rate (sections
4.01 and 4.02 of Revenue Procedure 96-64). For the transportation
industry, the federal M&IE rate is $36 per day under
section 4.04 of Revenue Procedure 96-64.
diem is treated as paid for M&IE only if the employer
separately pays for lodging, based on receipts submitted
by the employee; if lodging is provided by or directly paid
for by the employer; if the employee does not incur lodging
expenses; or if the per diem is calculated using the same
basis as the employee’s wages, such as hours worked,
miles driven, or pieces produced.
6.05 of Revenue Procedure 96-64 applies the IRC section
274(n) 50% limitation to per diems. If the per diem is for
M&IE only, all of the per diem is treated as for food
and beverages, and therefore subject to the 50% limitation.
If the per diem also includes lodging, the employer must
treat an amount equal to the federal M&IE rate as for
food and beverages. If a per diem that includes lodging
is paid at less than the federal rate, the employer may
elect to treat 40% of the per diem paid as the federal M&IE
rate. The remaining 60% would therefore be fully deductible
lodging expense. This election permits a deduction of 80%
(50% x 40% for the M&IE, plus 60% for the lodging).
Boyd, Continental Express, an S corporation, was
a long-haul trucking company, with an average haul of about
1,800 miles. In 1995–1997, Continental employed about
300 drivers, who were on the road an average of 25 to 28
days per month. Most drivers slept in their trucks, except
when fatigued or on layover, when they stayed in a motel.
Continental paid $25 per day in wages plus $30 per night
in motel expense for layover, but not for fatigue. The drivers’
travel expenses included meals, occasional motel rooms,
truck parking, showers, laundry, and Federal Express charges.
used the revenue procedures to substantiate deductions for
its drivers’ travel expenses. In addition to $0.25
to $0.32 per mile in wages, Continental paid the drivers
a per diem of $0.09 per mile (or about $31–$32 per
day) for travel expenses, which was less than the drivers’
actual travel expenses. Therefore, except for layovers,
the drivers were not required to submit receipts for travel
expenses. Continental’s per diem plan was typical
of per diems in the trucking industry. Finally, Continental’s
accounting system tracked only miles driven, not days worked.
deducted 80% of the per diem payments by treating only 40%
as subject to the 50% limitation and deducting the remaining
60% in full. The IRS applied the 50% limitation to all of
the per diem payments. Continental argued that the revenue
procedures were invalid in requiring all of the per diem
to be for M&IE and in applying the 50% limitation to
this amount. The IRS’ approach ignored the nature
of the expenses actually incurred by the drivers. Continental
submitted the testimony of three drivers, who said their
average daily nonmeal expenses were $7.61 per day. Continental
also claimed that its per diem on miles driven was based
on competitive reasons.
Tax Court’s Ruling
Tax Court ruled that the revenue procedures are valid and
Continental is allowed to deduct only 50% of the total per
diem payments. Because Continental’s drivers usually
slept in their trucks, the court ruled that Continental
did not prove that 60% of the per diem was for lodging.
Citing Beech Trucking [118 TC 428 (2002)], the
court pointed out that the revenue procedures are elective
and allowed Continental to avoid maintaining actual receipts
for each expense incurred by its drivers. Even though Continental,
unlike Beech, submitted evidence of the average nonmeal
expenses not otherwise subject to the IRC section 274(n)
50% limitation, the Tax Court ruled that this evidence was
irrelevant, and did not allow an additional deduction. To
deduct the nonmeal expense part of the per diem, Continental
would be required to substantiate all of the drivers’
actual (not average) travel expenses and not elect the revenue
procedures method. Taxpayers cannot pick and choose the
best features of both methods to maximize the difference
between the deduction and the record-keeping expenses.
paying employees’ travel expenses have a choice in
deducting travel expenses: substantiate actual (not average)
expenses, or adopt the revenue procedures method. A combination
of the two approaches is not allowed. The revenue procedures
method greatly simplifies record keeping, but subjects the
entire M&IE per diem to the 50% limitation. The result
is “at least rough justice,” the Tax Court noted.
For many employers, the cost of substantiating actual travel
expenses would exceed the additional taxes incurred from
this 50% limitation.
Taxpayer Relief Act of 1997 gradually increases the IRC
section 274(n) deduction for food and beverages from 50%
in 1997 to 80% in 2008 for workers in the transportation
industry subject to federal hours of IRS rules. The 2004–2005
deduction is 70%. Included are workers in air transportation,
interstate trucking, railroads, and the merchant marine.
Continental’s drivers would have been included. This
change to IRC section 274(n) does not affect workers in
other industries and does not eliminate the issue in Boyd
for transportation workers. It simply reduces the difference
between the deductions under the two methods when the M&IE
per diem includes nonmeal expenses.
C. Barton, CPA, JD, is a professor of accounting,
and Clayton R. Sager, PhD, is an associate professor of accounting,
both at the University of Wisconsin—Whitewater.