Confused (Per Diem)

[Gretel]

Somehow I got confused all of a sudden.

1. Do I have a choice each year to switch to the higher rate on 10/1. or do I have this choice only in the first year being in business, and then use whatever method I chose in the first year? (using the rate all year, which was in effect on 1/1.)

2. What are the requirements for using the high-low method? Can it be used even if T/P never travels to a high-cost locality? Is it for employers only?

[Snaggletooth]

Gabriele

I'll respond since no one else has, and this deserves an answer.

We may be somewhat confused as to the topic. I believe you are asking about reimburseable rates established by the Department of Defense and State Department for meals and lodging and incidentals in various towns.

As far as I know, there are far more implications for Federal Contractors than for tax preparers. The October 1 date is the result of the Federal government fiscal year, and otherwise does not impact us. I would think any employee who is reimbursed more than the aforementioned rates, however, would incur taxable compensation from his employer.

This info can help your clients, as it can maximize the amount paid to employees (including owners) without incurring taxable income to anyone, yet such payments are still fully deductible expenses.

Comments, anyone?

[Gretel]

Per Diem

Snag,

Thanks for responding. I can see that my questions are not clear enough. So lets start over again.

If we file Sch.C and take the per diem rate for M&IE, do we have a choice to switch to the higher rate after 10/1.? Or is this date (and the high-low method for that matter) for employers only?

Do Sch.C clients have to take the applicable per diem rate, which was in effect 1/1.?

[Bees Knees]

The per diem rates on pages 8-3 through 8-5 in TTB can be used both as a standard meal allowance for a Schedule C taxpayer, or as the amount an employer can reimburse an employee without requiring the employee to submit receipts under an accountable plan.

Rev. Proc. 2005-67 says that you have a choice for the last three months. You either use the rate that was in effect on the first day of the tax year for the entire year, or use that for the first 9 months, and then switch to the new rate in effect on October 1 of that year. But you have to be consistent.

However, the revenue procedure does say that if you used a substantiation method other than the Hi-Low method for the first 9 months of the year, you can’t switch to the Hi-Low method until January 1 of the following year. And vise versa: if you used the Hi-Low method for the first 9 months, you can’t switch back to another method until January 1.

As long as you use the same method year after year, then you have the choice of either using the new rates as of October 1, or wait until January 1 to switch.

[Bees Knees]

Generally, it is always best to switch to the new rates as of October 1 rather than wait until January 1 because the rates usually go up on October 1. That is why the IRS doesn't care if you wait until January 1 to switch because you would in most cases be using a lower rate for the last 3 months of the year.

But like I said before, the only time you are required to wait until January 1 is if you want to switch from a different substantiation method to the High-Low method, or switch from the High-Low method to a different method.