Per Diem Meal & Incidental Expenses for Self Employed

I have a client who is a self employed professional engineer providing consulting and project management services. He wants to structure his business invoices to his clients such that he can deduct 100% of his M&IE. His business is organized as a single memeber LLC, and he has a great deal of travel away from home. He also has some international travel expenses.

Please verify my understanding that those M&IE that are accounted to, invoiced to, and paid by the taxpayer's client are deductible at 100% on the tax payer's schedule C. In contrast, those legitimate business M&IE that are in town or out of town, but not accounted to or invoiced to a client (such as trying to secure a new client or contract) are only deductible at 50%.

  1. Does his invoice have to itemize on separate lines for his M&IE, or does is just need to be in his contract with the client that all his M&IE are to be reimbursed?

  1. Can he invoice his client the CONUS federal per diem rate for M&IE and then deduct that exact same M&IE on his schedule C at 100%? Thereby reducing his need to keep track of actual receipts.

  2. Can he invoice his client for an actual amount for M&IE and then deduct the CONUS per diem M&IE on his schedule C at 100%?

  1. Can he deduct the INTERNATIONAL federal per diem rate for M&IE on his schedule C at 100% if he invoices his international client for the same? Or does he have to keep actual receipts and records for his international M&IE. Because his internatinal client will not be responsible for the ultimate 50% limitation.....will that disqualify the taxpayer from deducting 100% on his return?

Thanks so much for any help you can provide!

Reply to
mmurrell
Loading thread data ...

I've always assumed M&IE ae for employees and not contracors.

A contractor has to account for all expenses separately, and those go on Sch C. Thee is no per diem or fixed schedule C deduction amounts. Provable ordinary and necessary expenses go to C.

If the facts & circumstances of a meal place it in the 50% category, then it's a 50% item.

Reply to
Arthur Kamlet

Thank you for your reply. I feel quite certain the federal per diem is available to self employeed individuals. Here is a quote from Internal Revenue Bulletin: 2008-41

"Section 4.03 Optional method for meal and incidental expenses only deduction. In lieu of using actual expenses in computing the amount allowable as a deduction for ordinary and necessary meal and incidental expenses paid or incurred for travel away from home, employees and self-employed individuals who pay or incur meal expenses may use an amount computed at the federal M&IE rate for the locality of travel for each calendar day (or partial day) the employee or self- employed individual is away from home. This amount will be deemed substantiated for purposes of paragraphs (b)(2) and (c) of § 1.274-5, provided the employee or self-employed individual substantiates the elements of time, place, and business purpose of the travel for that day (or partial day) in accordance with those regulations."

My question is can a self employed taxpayer account to and invoice their client this per diem amount in order for it to be 100% deductible rather than subject to the 50% limitation.

Reply to
mmurrell

If all you are asking is what a SE taxpayer can bill his client.... Yeah, he can bill the client whatever he wants. Bill him twice the per diem rate if he wants. Whether or not the taxpayer's client will pay it depends upon the terms of their agreement on expenses.

And... yes he can use the standard meal allowance for his tax deduction rather than his actual expenses as long as he keeps a record of the time, location and business purpose of the trip.

Reply to
Alan

However, it is inappropriate to exclude the reimbursement from income while taking the deduction.

Reply to
D. Stussy

That's a given. And.... here in New Mexico, the gross receipts from the client for services performed in N.M. is subject to gross receipts tax.

Reply to
Alan

Pub 463 has a section specifically about reimbursements to independent contractors (excerpts below). In previous discussions here, it was proposed that if the client takes the 50% limit, the sole proprietor does not have to, and may not even have to include the reimbursement in gross receipts?

The client does not have to include accounted-for reimbursements in

1099-MISC reporting, so I think the contractor also does not have to include in gross receipts. (and of course, if the reimbursement is not included in income, the expense would not be included in deductions -- it simply would not show up at all on the Schedule C or any 1099-MISC involving the contractor).

The pub is not authority, of course....

===[quote from 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 independent contractors and their clients or customers *** [emphasis added] You are considered an independent contractor 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.

How to report. For information on how to report expenses on your tax return, see Self-employed at the beginning of this chapter." [...] [following is for the client or customer--] "Contractor adequately accounts. If the con- tractor adequately accounts to you for entertain- ment expenses, you (the client or customer) must keep records documenting each element of the expense, as explained in chapter 5. Use your records as proof for a deduction on your tax return. If entertainment expenses are accounted for separately, you are subject to the 50% limit on entertainment. If the contractor adequately accounts to you for reimbursed amounts, you do not have to report the amounts on an information return."

-Mark Bole

Reply to
Mark Bole

That's what it looks like to me. To the extent you are simply being reimbursed for out of pocket expenses that you can properly account for, it's not considered income and need not be reported.

Reply to
Stuart A. Bronstein

This whole subject is covered in Revenue Procedure 2010-39. The IRS publishes an update every year on this subject. Based on my experiences when I was in Santa Clara County, CA (Silicon Valley) it worked as follows:

  1. Most of the larger employers used an accountable plan for both employees and ICs that required the submission of an expense account with actuals. Reimbursement was excluded from wages and compensation.
  2. Some of the smaller employers did not want to have to deal with the paperwork of expense accounts and used a per diem allowance for lodging, meals and incidentals. The per diem allowance was usaully the federal rate. This method required the employee or IC to merely account for the time away, location and business purpose. Reimbursement was excluded from wages and compensation.
  3. A few employers used actuals for lodging and a per diem for meals and incidentals. The employee or IC was reimbursed for the actual lodging and was paid a per diem for the number of nights away from home on the expense account. Reimbursement was excluded from wages and compensation.

#3 requires that lodging be based on actuals (if there was lodging expense) if the employers wants to use a per diem for M&I expense.

An IC did not bill the employer for travel expenses. The IC and the employer had arranged in advance how travel would be handled as the employer needed to comply with IRS rules to get a tax deduction. Basically it was "I need an expense expense submitted." or "I need you to account for the days you are traveling away from home." In those instances where ICs actually billed their expenses, there was no substantiation and the payment was included on the 1099-MISC as nonemployee compensation. The IC deducted the expense on Schedule C.

Reply to
Alan

text -

The last sentence reads "The IC deducted the expense on Schedule C.".....Does the IC deduct his M&IE at 100%, or would he only get the

50% deduction?
Reply to
mmurrell

text -

The answer is on Page 11 of Pub 463. In the scenarios I built, you have an IC billing the client and not adequately substantiating the expenses. As such, the IC's meals and entertainment expense would be subject to the 50% rule.

Reply to
Alan

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.