What the Heck is Per Diem?
One of the most frequent questions I get from my drivers is what is per diem and how do I make the most of it? The simplest answer in the tax sense is that per diem is daily deduction that you get to claim without having to spend a single dime for food and incidental expenses. Per diem is set at special rates for those under the DOT’s hours of service requirements, which means you get an average rate instead of having to keep track of what city you were in and then finding that city’s rate.
Why does it matter to me?
Per Diem is the only deduction that you get simply for being on the road, to help offset the additional cost of food on the road, this does not include showers or toiletries, only food items. My advice to all drivers is eat as cheaply as possible, if you are spending $20,000 plus a year on food it better be a steak every night and we all know that's not what truck stops offer. Stock a fridge/freezer/or cooler (all of which if you purchase the appliance is considered a write off) and you will spend significantly less on food while on the road. Now you can claim more than the per diem rate, but you will need to track all your receipts and take 80% of that amount, but you have to use that method for every day that you are on the road for the year, so if you are spending below the standard rate for per diem, this method does not make sense. Right now, the standard rate for per diem is set at $63 a day for every full 24 hour day, and $47.25 for any day that you are arriving and departing from home (partial days). Of these rates, you get to claim 80% of the rate, where as the average non truck driving taxpayer can only claim 50%. This is a huge distinction as you can end up leaving several thousands of dollars on the table. Just to put this into perspective: if you had 300 full days on the road with 24 partial days you would have a total per diem base rate of $20,034 once you apply your 80% you now have a claimable per diem expense of $16,027.20. If you or your tax preparer claim the 50% of the deduction, you end up with a total deduction of $10,017 just over $6,000 that you should have been able to claim, which can be anywhere from $600 to $2600 less in your overall tax bill, and that’s just on the federal side. If your tax preparer does not know what rate your per diem should be claimed at off the top of their head, run don’t walk, they are going to end up leaving money on the table, most likely not just with per diem but in other areas as well.
So how do I claim per diem?
You need to know if you are an Independent Contractor (1099) or Employee (W2).
Those that are IC’s you will claim it on your Schedule C against your income before self employment taxes are applied. Reducing not only your income tax but also your self employment taxes (15.3% in 2016) and then also your income tax on form 1040.
Those of you who are employees will need to claim it on your Schedule A, but this means that you are deciding to itemize instead of claiming the standard deduction for you taxes. The deductions on the schedule A are made up of mortgage interest, medical expenses over 10% of your AGI, Charitable Deductions, and unreimbursed employee expenses (this is where your per diem kicks in). Remember your standard deduction breaks down as follows: Single or Married Filing Separate $6,300 , Head of Household $9,300 and Married Filing Jointly- $12,600. This means that if you are opting to itemize instead of taking the standard, you will want to make sure your itemized is more than your standard.
So how do I track per diem?
The IRS generally will only accept your logs as proof of your time on the road, if you have elogs make sure that you are backing them up as most companies wipe them from the record every 90 days and then you are out of luck in an audit. For the sake of your and your accountant’s sanity, you can keep a calendar of the days you are on the road and mark days that you leave/ arrive home with a slash and full days use an X through the date, so that all you have to do is count up the slashes and and X’s and keep the logs as a back up.
So I am a company driver and my carrier offers to pay me my per diem or reduce my check by my per diem, should I take it?
Depends. If your HR pays out the per diem as taxable income (check your pay stubs or call and ask). You will need to claim the per diem against it to cancel it out, but if they offer to reduce your income by that amount or reimburse you without taxing the income you have an opportunity to double dip since you could claim the standard deduction against the remaining income for the year but still reap the benefits of per diem. If you wanted to still itemize in this case you will need to calculate out what your could have claimed throughout the year and then subtract out what you were paid per diem and then claim the balance on your schedule A.
What about the owner operators?
If you are claiming it on your Schedule C make sure that you decide to claim the expense instead of taking the payments throughout the year, you are going to significantly reduce the taxes that you owe throughout the year without having to spend any money, remember you get this deduction based on the fact you were on the road, not how much you actually spent.
But what about ________?
I am happy to consult with you if you want to shoot me an email or message me on Facebook or Reddit. If you have specific questions I am happy to consult with you free of charge.
If you shoot me an email at Drew@archertaxgroup.com , I am happy to send you an excel based calculator to help you figure out your per diem expense. I can also help you amend the last 3 years of tax returns if you think your tax preparer left money on the table for you. At Archer Tax Group, we promise to review your return for free and only amend your return if you will get a sizable refund above our fees that makes sense for you and your family. Everyone’s taxes are different and I encourage you to read the IRS' Publication 17 for more information, this article is not meant as explicit tax advice, always consult with a tax professional before making a decision to pursue any tax strategies.
And as always, drive safe!