Accountable plans, reimbursements and per-diem allowances.

• Author: Kenny, William J.
• Position: Part 2

Employers commonly use per-diem and mileage-allowance arrangements to advance or reimburse employee travel expenses. Part II of this two-part article describes and compares different kinds of per-diem and allowance arrangements that can meet accountable-plan substantiation requirements.

EXECUTIVE SUMMARY

* There are many ways to calculate per-diem rates and mileage allowances for accountable plans.

* A company may design its own per-diem and mileage arrangements for reasonably expected expenses.

* In many industries, it is customary to pay compensation-based per-diem and mileage allowances.

Generally, employers use per-diem allowance arrangements to reimburse employees and independent contractors for business expenses incurred while traveling away from home overnight on business. Mileage allowances are commonly used to advance or reimburse an employee for use of his or her car in pursuit of the employer's business. There are several types of per-diem and mileage-allowance arrangements available to taxpayers that can potentially reduce recordkeeping for the specific expense amounts covered under the plan. However, employers do not have to use or adopt any such plan; instead, they can base reimbursements on actual expenses and still comply with accountable-plan requirements. Part I of this article, in the July 2003 issue, discussed general rules for reimbursements from accountable plans. Part II, below, examines various types of per-diem travel and mileage allowances commonly in use and how they operate to reimburse or advance workers' expected business and travel expenses.

Federal Per-Diem Arrangements

Per-diem allowances may be used for any employee or worker engaged in business travel. They are customarily used to reimburse employees and self-employed (SE) persons who travel for others; they are most commonly used by companies to advance or reimburse employees traveling away from home overnight on business.

A per-diem allowance is a payment under an accountable plan that is:

* Paid for ordinary and necessary business travel, including lodging, meals and incidentals;

* Reasonably calculated not to exceed the anticipated amounts of such expenses; and

* Paid at the Federal per-diem rate or a rate specified under one of the allowable alternatives discussed below.

There are many ways to calculate per-diem amounts:

1. The Federal specific locality or regular Federal per-diem rate method;

2. Actual lodging expense with standard allowance for meals;

3. The Federal high-low method; or

4. Any company method that is reasonable in amount.

Basically, use of an acceptable per-diem method and rate satisfies the substantiation requirements for the expense amounts covered by the specified rate. However, each method has other advantages and disadvantages. Exhibit 1 on p. 492 summarizes the pros and cons of the different arrangements discussed below.

Specific-Locality Method

The Federal government publishes per-diem amounts for travel by government employees to specific localities around the U.S. and many foreign locations. (17) These amounts may be used by employers as company per-diems for substantiation purposes. The amounts for each location within the continental U.S. (CONUS) appear in IRS Pub. 1542, Per Diem Rates (For Travel Within the United States). In many localities, the maximum amount may only be used for part of the year. The 2003 per-diem rate for locations not specifically listed is $55 for lodging and $30 for meals and incidental expenses (M&IE).The rates are generally updated in the fall. Taxpayers then have the option of either increasing the per-diem rate for the fourth quarter or using the prior rates for the entire year. For purposes of the Sec. 274(n) 50% meals expense write-down, the M&IE portion of the Federal per-diem rate is 40%, under Rev. Proc. 2002-63. (18)

Actual Lodging Expense with Federal M&IE Rate

This is a variation of the specific-locality method; it allows employers to reimburse actual lodging costs and pay a per-diem amount for M&IE. The recipient must substantiate the actual lodging expense, but not the M&IE. Incidentals are fees or tips for services (such as porters...