When it comes time to settle up your tax debt, you’ll likely have a few options to discuss. If you’re fortunate, you’ll be able to take a handful of deductions to bring down your taxable income, providing a low overall tax bill. As any good tax attorney or account will tell you, there are dozens of deductions you could take to reduce that liability. Some will be more applicable than others. For people who happen to work out of town often, deducting per diem is an excellent option. What should you know about per diem tax deductions for heading on the road? Here is a guide.
Two methods your company may use to determine your per diem rates
The General Services Administration is a government agency that makes recommendations to the IRS on how to handle issues like an employee’s per diem for working on the road. They recommend that the IRS exempt some per diem from taxable income. The GSA also recommends that employers use one of two methods for calculating the rate they will pay. The high-low method puts some out of town locations in the high category and some in the low category. Which category a location happens to occupy will determine how much you are given. The second method provides a rate for every location, which can cause accounting headaches. Companies are required to choose and maintain one method for all employees.
Excluding per diem from taxable income
The first thing to know is that under IRS rules, per diem paid to employees to cover business expenses is not taxable income. This means that if you have been working 30 days on the road and happen to incur $3,000 in per diem, then this would impact your taxable income at the end of the year. If at the end of the year you choose to itemize your taxes, you can exclude that $3,000 from taxable income, pretending you never received it at all for tax purposes.
There may be times, however, when your company does not provide enough per diem to cover your business expenses. Perhaps they provide a low rate of mileage for your travel. Maybe they provide only a set amount for a hotel while your destination has abnormally high rates on hotel stays during the weekend you have to do business. Whatever the case may be, when you find yourself in a situation where your company has made you cover some of your costs, you can possibly deduct this amount from your taxes.
Form 2016 and the importance of keeping receipts
In order to file for a deduction to cover business expenses that were not reimbursed or were underpaid, you will need to file Form 2016 with the IRS. This will allow you to document expenses as well as the per diem you were given. On top of that, you will want to keep all receipts from these trips. This includes meals, hotels, gas and anything else you may need to deduct. If you happen to get audited, you’ll need this information for protection during that inquiry.