IRS issues Revenue Procedure providing more guidelines on per diem expense reimbursements.

Nonprofit and Church Legal Trends - Free Edition - March April 2007 (free edition)

The IRS has released a Revenue Procedure clarifying and updating the rules for paying per diem’s to employees. Many churches and nonprofits reimburse their employees’ business expenses with per diem allowances. This Procedure clarifies a number of aspects of the regulations.

Under the per diem rules, an employer can pay a certain amount to an employee to reimburse him for business expenses regardless of the actual costs incurred. Thus, based on published per diem rates, it is often possible for employers to legally pay an employee more than he actually spent on a business trip. This can be a way for the employee to receive additional tax free income. The published rates are available at the General Services Administration website: www.gsa.gov.

This new procedure looks at the following issues:

• Amount of expenses deemed substantiated: If an employer pays a per diem allowance in lieu of reimbursing actual lodging, meal, and incidental expenses, the amount of the expense that is deemed substantiated for each calendar day is the lesser of the per diem allowance set by the employer for that day or the amount computed at the federal per diem rate.
• Does there actually need to be an expense incurred? A frequent issue that arises in travel by staff of nonprofit organizations involves situations where there may be no actual expense incurred. For example, a missionary may stay in the home of a friend or supporter, incurring no lodging expense. Or a pastor traveling to speak at another location may have some of his meals provided at no expense to him. Can these individuals still receive a per diem allowance?
• What if the employee is not gone for a full 24–hour period? The full federal meal and incidental expense rate is available for a full day of travel from 12:01 am to 12:00 midnight. But what if an employee is not gone for a full 24 hour day? The Procedure says that an employer may use one of two different methods to determine the amounts deemed substantiated for partial days of travel.
• Watch out for double reimbursements: The Revenue Procedure is very clear that there must not be any double reimbursements. If an employee is getting a per diem allowance for M&IE expenses, he cannot be reimbursed for any other actual M&IE expenses.
• What if too little per diem or too much per diem is paid? If too little, the employee may be able to claim an itemized deduction on his personal tax return for the excess. If too much, the excess is subject to withholding and payment of employment taxes.