Business Related Travel; Can I use per-diem rates on my return?
July 28, 2004
By Jim Harnsberger, Sr. Tax Analyst

SAN DIEGO – The question of “substantiation” is always an area where a taxpayer risks running into odds with the IRS when it comes to the issue of business related travel expenses.

Several factors must be considered and the code makes clear, the tests that are required. Where the confusion generally comes is in the case where a taxpayer decides to use the “per diem” rates absent any documentation of the business related events.

Section §162 allows deductions for all ordinary and necessary expenses incurred in carrying on a trade or business. Sec.§162(a). These expenses include traveling expenses (i.e., meals and lodging) while away from home. Sec. §162(a)(2).

However, section §162 does not allow deductions for personal, living, or family expenses. Sec. §262. To qualify under section 162(a)(2), the expenses must be (1) reasonable and necessary, (2) incurred while “away from home”, and (3) incurred in pursuit of a trade or business. Commissioner v. Flowers , 326 U.S. 465, 470 (1946).

In the context of section 162(a)(2), the word “home” does not have its ordinary and usual meaning. Rather, the word “home” refers to the taxpayer’s principal place of business or employment and not his personal residence. Putnam v. United States , 32 F.3d 911, 916 (5th Cir. 1994); Mitchell v. Commissioner , 74 T.C. 578, 581 (1980).

If a taxpayer has more than one place of business, his tax “home” is: (1) The place where he spends more of his time; (2) the place where he engages in a greater part of business activity; and (3) the place where he derives a greater proportion of his income. Robertson v. Commissioner , T.C. Memo. 1997-526 (citing Hoeppner v. Commissioner , T.C. Memo. 1992-703), affd. 190 F.3d 392 (5th Cir. 1999).
Accordingly, a taxpayer is entitled to per diem allowances, if the tests are met, based on the Federal meals and incidental expenses rate for each city and taxable year. 41 C.F.R. ch. 301, pt.7 & app. A (1993); 41 C.F.R. ch. 301, pt.7 & app. A (1994); 41 C.F.R. ch. 301, pt.7 & app. A (1995).

The taxpayer should apply the appropriate per diem rate for each city and taxable year in which a deduction may be claimed. 41 C.F.R. ch. 301, pt.7 & app. A (1993); 41 C.F.R. ch. 301, pt. 7 & app. A (1994); 41 C.F.R. ch. 301, pt.7 & app. A (1995). Documentation of the travel event; the purpose of travel or nexus to the business activity; and the duration of the stay should all be documented in a travel record.

San Diego based Tax Smart America provides a unique method to properly account for, plan, and take advantage of the tax code in order to meet the tests imposed under the code, and to meet the requirements allowing for the use of “per-diem” rates. For more information visit their website at www.taxsmartamerica.biz or contact the company at (619) 469-5800.