How to Use Per Diem Rates for Small Business

Small business owners are always trying to make their lives easier and efficient.  Who could blame them.  This article aims to explore the entrepreneurs option to use per diem rates while traveling.

Basically there are two ways one can deduct travel expenses.

  1. The actual cost of meals, incidental expenses, and lodging can be deducted provided that the taxpayer can substantiate the expenses with the amount, time, place, and business purpose.
  2. The taxpayer can elect to deduct the expenses at the federal per diem rate, in which such an amount is deemed substantiated provided it meets the business purpose requirement.

Keep in mind, that there are some quirks relating to certain small business entity.  Of course, I am sure you didn’t expect the per diem to be simple and easy.  However, if you can take advantage of per diem rate then why not make life easier

Sole-Proprietor or Single Member LLC Per Diem Rates

As a self-employed individual (Schedule C Business Income), the federal per diem rate is only available for meals and incidental expenses and not overnight lodging expenses. This means that a self-employed individual must deduct the actual cost of lodging expenses paid, which can be substantiated with receipts of lodging and documentation as to the place and time of the business activity.

S Corporation or C Corporation Per Diem Rates

For a corporation (C Corp or S Corp), corporate employers cannot use the per diem that includes lodging for owner-employees with more than 10% ownership, based on direct or indirect ownership. As a result, if one has more than 10% ownership in a corporation the deduction for lodging is limited to the actual out-of-pocket expense. On the other hand, the option of using the federal per diem rate for meals and incidental expenses, as a more than 10% owner of a corporation, can help reduce the recordkeeping burden for those expenses. Please note that if one uses the per diem option for meals then only the costs of client’s meals may be deducted as a business expense so as to not double dip on the meals deduction.  If you are really bored  then  further research on the subject can be found in IRS Revenue Procedure 2007-63.

In your small business do you prefer actual costs or per diem rates?


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