The Internal Revenue Service recently served up a few surprises along with its annual revision of rates for lodging, meal and incidental expense allowances. Specifically, the agency has raised the meal allowance for truck drivers and created an optional “incidentals-only” expense allowance. These are contained in Revenue Procedure 2002-63, which adjusts the rates for advances and reimbursements of per diems for workers who are away from home overnight on business. (To see full procedure, go to www.irs.gov.)
In lieu of actual reimbursement, companies can pay a full per diem, covering lodging, meals and incidental expense (M&IE), if they have reason to believe lodging expense will be, or was, incurred. Per diem rates for numerous locations have been revised, usually upward but in a few cases downward. Companies can choose city-by-city per diems; a standard per diem rate of up to $125; or a standard rate plus a high-cost locality rate of $204 for roughly 50 localities. Companies must treat as meal expense either the M&IE rate for each locality or $45 for high-cost localities and $35 for other localities. These rates are available retroactively to Oct. 1, 2002.
If lodging expense is not likely to be incurred, as with drivers who have sleeper cabs, companies can pay an M&IE allowance. Under a special rule for the transportation industry, companies, employees and independent contractors can now use an allowance of $40 per full day in the “lower 48” states and $45 in Alaska, Hawaii and outside the U.S. These rates are up from the $38 and $42 levels that apply for 2002. Unlike the Oct. 1 effective date above, these special rates for the transportation industry cannot be used until Jan. 1, 2003.
The full amount of an M&IE allowance must be treated as a meal expense. In 2002 and 2003, meal expenses are 65% deductible for truck drivers who are away from home long enough to require sleep or rest, and 50% for other workers. Trucking companies can also pay the allowance on a cents-per-mile basis if the total doesn't average more than these daily limits. Amounts that average more than these levels must be reimbursed or treated as wages, subject to withholding, payroll tax and reporting on a W-2 form at year-end.
In contrast, under the new incidentals-only plan for individuals who do not receive allowances for lodging or meals, companies can pay $2 per day that is fully deductible. Like the full per diems and the M&IE allowances, the incidental amount does not count as income to the recipient if it is in conjunction with documented business travel away from home.
Self-employed individuals and employees who receive no advance or reimbursement from their company can claim either the M&IE allowance or the $2 incidental expense allowance. All individuals must use the 65% or 50% deductible limit for meals, and employees must then treat the remainder (or all of an incidental-only allowance) as a miscellaneous itemized deduction.
Workers who are out of town overnight and part of the next day (or who leave late one day and stay out overnight) are entitled to 3/4 of a day's allowance for the partial day. Previously, allowances had to be prorated by 1/4 day increments. One last change: laundry and dry cleaning expenses no longer have to be counted as incidental expenses, if companies want to reimburse for them (or individuals want to deduct them) item by item.
The bottom line: Travel rules are tricky. If you are paying for a lot of travel, however, these so-called accountable plans are a great time saver for drivers and bookkeepers alike. And the new options and rates may make them more attractive than ever.