What is per diem?
Per diem is a fixed allowance amount that could be used in your tax return as a deduction. Literally, per diem means “per day,” and you can think of it as a set amount that you will be reimbursed for certain expenses per day. Instead of keeping a receipt every single day of your trip, you simply count how many days you were away from home and multiply this number by the fixed amount given by the government. The benefit of using per diem is a lower administrative burden and also additional cash to truck drivers on a pre-tax basis.
How much is the per diem allowance?
The IRS has published updated per diem rates, which will take effect on Oct. 1, 2021, and which taxpayers can use to substantiate the amount of housing, meals, and incidental costs they incur when traveling away from home.
This includes the special transportation industry rate of $69 for any location in the continental United States and $74 for any locality outside the continental U.S. The rate for any travel locale inside or outside the continental U.S. for the incidental-expenses-only deduction is $5 per day.
Those in the transportation industry will face an additional restriction related to per diem – Department of Transportation (DOT) limits, which currently allows to only deduct 80% of the above-noted rate.
Prior to that date, the per diem amount was $66 for any continental locality and $71 for non-continental. This means that in 2021 all days must be split into two categories (before 10/1 and after 10/1) to ensure proper amount calculation.
Rules for partial days
On the day of your arrival and departure, your deduction is limited, as it only counts as a partial day. The per diem rate for a partial day is ¾ of a full day. If your normal rate is $69 per day, your per diem rate for a partial day would be $51.75.
Per diem rates for riders
If a spouse or partner rides with you to help assist with your duties, they can also claim a per diem tax deduction. Riders without a CDL who help with bookkeeping, dispatching, and loading or unloading can claim a per diem rate of 50% per day. The IRS allows them to deduct half of the standard per diem allowance from their taxable income.
Who can use Per Diem in the tax return?
If you’re an independent contractor who receives form 1099BEN or owner-operator, you are eligible to claim the per diem whenever you’re away from home. You must be long enough from home for you to sleep away. A nap does not necessarily consist of having to spend a full day away from home. Your off-duty rest period must be long enough for you to rest. In most cases, if you are fulfilling Hours of Service (HOS) requirements away from home, you can claim the per diem tax deduction.
Prior to the enactment of the Tax Cuts and Jobs Act, this deduction was also available to W2 employees, but Congress has decided to cut taxes, and every time our politicians cut taxes, they remove certain deductions to compensate for lost revenue. As a result, the decision was made to remove this deduction for W2 employees.
What documents are needed to support per diem deduction?
A driver’s logbook can be used to verify you are eligible for a per diem deduction on your tax return, as it demonstrates the amount of time you spent on the road during the year.
Should I use a per diem deduction or not?
Amount deducted reduces your federal and state taxes (if applicable), as well as contributions to Social Security and Medicare. Keep in mind that your future Social Security payments are based on your lifetime contributions. We often see that self-employed individual tends to over deduct certain expenses in order to minimize their taxes, however, in the long run hurting themselves by under contributing to those programs.
Another issue of reducing taxable income is the possibility of mortgage application rejection, as banks look at the bottom line figures, not the income before any deductions.
At the same time, lower gross income could positively affect someone’s eligibility for public assistance, student grants, and loans, or lower insurance rates.