Payroll in Practice: 11.27.2023

Question: Does the 50% deduction for business meals apply to per diem reimbursement under an accountable plan?

Answer: Yes, the 50% expense deduction limitation for meal costs applies to per diem reimbursements paid to employees for business meals.

Internal Revenue Code Section 162(a)(2) generally allows a deduction from gross income for ordinary and necessary business travel expenses. This includes expenditures for meals while traveling, other than lavish or extravagant amounts. Section 274(n), however, limits the deduction for certain food or beverage expenses to 50% of the amount that would otherwise be allowable as a deduction. For certain workers in the transportation industry, the deduction is limited to 80% of the otherwise deductible cost.

When an employer reimburses meal expenses incurred by an employee, the 50% limitation is imposed on the employer but not the employee. For example, an employer reimburses an employee $50 for a travel meal. The employer’s deduction for the meal expense is limited to $25, but the employee is made whole by the $50 reimbursement. Congress did not intend for reimbursement of such expenditures to create additional taxable compensation for employees.

Under an accountable plan, employers are required to substantiate allowable expenses by maintaining adequate records or other sufficient evidence. Generally, the IRS does not require receipts for expenditures of less than $75, except for lodging, or for transportation expenses for which receipts are not readily available. For internal control purposes, however, employers might choose to require receipts at lower thresholds.

For employers using an accountable plan, a per diem or standard allowance may be a good alternative to substantiating actual expenses. Implementing these alternatives can simplify the expense reimbursement process by paying employees a predetermined amount intended to cover the ordinary and necessary costs of lodging, meals, and incidentals for each day of travel away from home. Receipts are not required to substantiate expenditures covered by the per diem, including lodging.

Under Revenue Procedure 2019-48, an employer may use a per diem rate or standard allowance to reimburse employees for meals and incidental expenses only. If there is a lodging cost, it must be substantiated to use this method.

Employers may use the maximum federal rates established by the General Services Administration or the high-low method rates set by the IRS. These rates are revised each year and are set for the federal fiscal year of Oct. 1 through Sept. 30, but employers may use them on a calendar year basis.

An employer that uses the high-low method for an employee must use it for all amounts paid to that employee for travel away from home within the continental US during the calendar year. IRS Notice 2023-68 provides the rates for the current fiscal year regarding the 50% meal limitation. The notice also contains special rates for taxpayers in the transportation industry.

The 50% deduction limitation is applied to the amount deemed substantiated under the per diem arrangement. In the following examples, the employer’s per diem allowance rate is $68 for meals and incidental expenses only.

When a per diem allowance is paid for M&IE only, the amount substantiated as expense for food and beverages is the lesser of the allowance or the federal daily M&IE rate for the travel location.

Example 1: The GSA M&IE maximum rate for travel to Chapel Hill, North Carolina, is $74. The $68 per diem rate is less than the GSA rate so the deemed substantiated expense is limited to $68. The employer meal deduction is $34 (50% of $68).

Example 2: The GSA M&IE maximum rate for travel to Asheville, North Carolina, is $64.The GSA rate is less than the $68 per diem allowance, so the deemed substantiated expense is limited to $64. The employer meal deduction at 50% is $32. The $4 excess payment over the substantiated amount is treated as paid under a nonaccountable plan and is subject to payroll taxes and withholding.

If a per diem allowance is paid for lodging, meals, and incidental expenses at a rate equal to greater than the federal per diem rate for the travel location, the payor must treat an amount equal to the federal M&IE rate for the locality as the expense for food or beverages. The effect is the same as that in Example 2.

For fiscal year 2023-24, the amounts treated as paid for purposes of the 50% meal deduction under the high-low method are $74 for designated high-cost areas and $64 for all other areas in the continental US. The employer meal expense deduction is $37 for high-cost areas and $32 for low-cost areas.

If a per diem allowance is paid for lodging, meal, and incidental expenses at a rate less than the federal per diem rate for the travel location, a payor must determine the amount of expense for food or beverages in one of two ways. For each calendar day or partial day of travel, the payor may: (a) treat an amount equal to the federal M&IE rate for the travel location or, if less, the amount of the allowance; or (b) treat an amount equal to 40% of the allowance as an expense for food or beverages.

For example, an employer pays a per diem of $150 (lodging, meals, and incidentals). And the combined lodging and M&IE GSA rate for Chapel Hill, North Carolina, is $204.

Under (a) the employer is to treat the $74 M&IE GSA rate as the substantiated meal expense and may deduct $37 as meal expense. However, if the employer per diem rate is $70 instead of $150, the meal allowance is limited to $70 for a $35 meal expense deduction. Under (b) the substantiated amount is $60 (40% of $150). The employer is limited to a $30 deduction for meal expenses.

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

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