Two recent IRS pronouncements and a U.S. Tax Court decision are important for companies paying for driver meals. Depending on how a company handles these expenses, it may see no change, an increase, or the total disappearance of its deductions.
In Revenue Procedure 2006-41, the IRS provided its annual update of meal and incidental expense (M&IE) allowances. The basic allowances for 2007 were left unchanged from the rates set a year ago.
Specifically, transportation businesses using a single nationwide rate, rather than the city-by-city rates included in the revenue procedure, can treat payments of up to $52 per day in the “lower 48” states as being for M&IE. The rate for travel in Canada, Alaska, Hawaii and other locations is $58. These amounts can be excluded from the driver's income and do not have to be reported on a W-2 or subject to employment taxes.
Two features of the rules are especially helpful to trucking companies. First, payments can be made on a cents-per-mile basis. Second, the calculation of whether a payment exceeds the $52 or $58 daily limit need not be made day by day, but can be averaged over a period as long as a month. Thus, a driver who receives an M&IE allowance of 10¢/mi. and who travels 600 miles one day and 400 the next is within the allowable limit for two days ($104), even though the allowance for the first day ($60) exceeds the daily limit.
However, there are several conditions that must be met for the payments to qualify for such treatment. Drivers must provide proof that they were away from home on business long enough to require sleep or rest. Payments for partial days away from home must be pro-rated. Excessive or unsubstantiated payments must be returned or treated as wages and compensation subject to employment taxes and W-2 reporting.
In Revenue Ruling 2006-56, the IRS described a hypothetical employer of long-haul truck drivers that uses a monthly payroll period and a cents-per-mile compensation method. The company does not have policies or practices for tracking the amount of M&IE paid to each driver, nor a mechanism for determining when the allowances exceed the amount deemed substantiated. Such an arrangement does not satisfy the requirements for an “accountable plan.” As a result, all M&IE payments, not merely ones that may exceed the daily average allowed, must be treated as wages.
Can a driver who leaves and returns home the same day be away long enough to require sleep or rest? The Tax Court looked at this in Bissonnette v. Commissioner, Tax Court No. 5988-05. The case involved a Puget Sound ferry captain who often napped during a 6-to-7-hour layover in Victoria on a round-trip that started and ended in Seattle, his home town. Because his shift was so long, 15 to 17 hours, he sometimes also slept on a cot on the boat in Seattle between daily trips.
The IRS argued that he was not away from home, or that if he was, he should still receive only a partial day's M&IE allowance because he was gone less than 24 hours. The Tax Court ruled that his job was demanding enough that the rest he took during the layover was a necessity, even if it was not required by his employer or by regulations. The court also decided that his workday was long enough to satisfy an example of a full day included in the revenue procedure.
The bottom line: In both the court case and the new revenue ruling, the IRS is signaling a get-tough approach to M&IE deductions. Companies paying them should read all three documents carefully to be sure of staying on the right side of the law.
