Per diem received

[equinecpa]

I have a client who is a judge who travels out of state most weekends. The terms of her contract is she usually receives a per diem for meals of about $30-$35 per day. She then pays for her own meal expenses.

Can she exclude these per diems received from income and exclude her meals expense?

I'm entering her schedule c right now and have them as income but am then limiting her meals deduction by half. I got to thinking if the associations paid directly for her meals she would be better off as that wouldn't get reported on her tax return. As it stands due to the 50% limitation on the meals deduction, part of these per diems will end up being taxable income.

[abctax]

per diem received

I don't think you can use per diem on a Sch C.....

Found what I was remembering; Self Employed can use M&IE but must use actual expenses for lodging.

[geekgirldany]

Take a look at this:

http://www.taxresourcegroup.com/library/memo/1332.html

I know it is old but maybe it can lead you in the right direction.

[erchess]

That Definitely is an OLD CITE

but it could still hold true. If I were the preparer I would pay for a couple of opinions because I don't trust my own research. On the other hand another preparer might have more ability to do research than I do. At the risk of belaboring the obvious, if you want to not report the reimbursements you need ideally to receive a 1099 or corrected 1099 that does not reflect them or failing that there are disclosure requirements that I personally do not off hand know how to meet. Between this board and the other resources I have I can find out but I don't know at present and the client for whom I find out is going to pay for several hours of my time.

Dany what is this TRG that you linked to?

[geekgirldany]

You know I am not sure who they are. I have access to additional research sources and found a partial answer and just typed it into Google to see if I could find anything that matched it. I found this and thought it might be a good starting point for research. The other research source I refer too... not sure if I can copy and paste the information to the board.

In short it said that employees and independent contractor can forgo the 50% Limitation if it is under an Accountable Plan and the company paying them takes the 50% limitation instead. Looks like it references a court case TAM 200030001.

[Bees Knees]

If the per diem follows the accountable plan rules, it IS an accountable plan.

As long as the per diem does not exceed the federal rate for meals, the judge excludes the per diem from income and does not take a deduction for the actual cost of food.

From TTB page 8-12:

Per diem is the allowance for travel, lodging, meals, and incidental
expenses. An employer can reimburse employees under an
accountable plan based on travel days, miles, or some other fixed
allowance. The employee is considered to have accounted to the
employer the amount of the expense that does not exceed the
rates established by the federal government. By using a per diem
allowance, the employee is not required to submit receipts to the
employer to meet the accountable plan rules. However, employees
are still required to substantiate the time, place, and business
purpose of a trip.

[Bees Knees]

Self employed

I missed the Schedule C issue in the original post. Per diem is still allowed for self employed, but with a little more accounting required.

The following is from IRS Pub 463:

Rules for Independent
Contractors and Clients

This section provides rules for independent con-
tractors who incur expenses on behalf of a client
or customer. The rules cover the reporting and
substantiation of certain expenses discussed in
this publication, and they affect both indepen-
dent contractors and their clients or customers.

You are considered an independent contrac-
tor if you are self-employed and you perform
services for a customer or client.

Accounting to Your Client

If you received a reimbursement or an allow-
ance for travel, entertainment, or gift expenses
that you incurred on behalf of a client, you
should provide an adequate accounting of these
expenses to your client. If you do not account to
your client for these expenses, you must include
any reimbursements or allowances in income.

You must keep adequate records of these ex-
penses whether or not you account to your client
for these expenses. If you do not separately account for and seek
reimbursement for meals and entertainment in
connection with providing services for a client,
you are subject to the 50% limit on those ex-
penses. See 50% Limit in chapter 2.

Adequate accounting. As a self-employed
person, you adequately account by reporting
your actual expenses. You should follow the
recordkeeping rules in chapter 5.

Thus, the difference between a self-employed receiving per diem from a client, verses an employee receiving per diem from an employer is the self-employed must still keep track of actual expenses and account for these to the client. The employee does not have to keep track of actual expenses and account for these to his/her employer.

Both self-employed and employees receiving an allowance (per diem) that follow these rules do not have to count the per diem as income nor take a deduction for the expense. Thus, both the self employed and employee are by-passing the 50% rule when they do not have to count the per diem as income or take a deduction for the actual expenses. The self-employed, however, must still keep track of and account for actual expenses paid.

[equinecpa]

Thanks Bees that makes it quite clear.

On a logistics note...the IRS asks that the taxpayer give their client an adequate accounting. How does one prove this to the IRS? Do you think stapling the relevant meals receipts to the contract would show that you matched up receipts? It doesn't show you submitted them to the client.

[Bees Knees]

Pub 463 says to follow the adequate accounting rules discussed in chapter 5. That chapter discusses keeping actual receipts. Thus, just to be safe, I would have the self-employed individual make copies of all receipts and staple them to the summary sheet given to the client that shows total expenses incurred. The self-employed individual should keep the originals for himself or herself.