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or other expense allowance to you within a rea- sonable period of time. Reasonable period of time. A reasonable pe- riod of time depends on the facts and circum- stances. Generally, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time. 1. You give an advance within 30 days of the time the employee pays or incurs the ex- pense. 2. Your employees adequately account for their expenses within 60 days after the ex- penses were paid or incurred. 3. Your employees return any excess reim- bursement within 120 days after the ex- penses were paid or incurred. 4. You give a periodic statement (at least quarterly) to your employees that asks them to either return or adequately ac- count for outstanding advances and they comply within 120 days of the date of the statement. How to deduct. You can claim a deduction for travel and non-entertainment related meals ex- penses if you reimburse your employees for these expenses under an accountable plan. Generally, the amount you can deduct for non-entertainment related meals is subject to a 50% limit, discussed later. If you are a sole pro- prietor, or are filing as a single member limited liability company, deduct the travel reimburse- ment on line 24a and the deductible part of the non-entertainment related meals reimburse- ment on line 24b, Schedule C (Form 1040), or line 2, Schedule C-EZ (Form 1040). If you are filing an income tax return for a corporation, include the reimbursement on the Other deductions line of Form 1120. If you are filing any other business income tax return, such as a partnership or S corporation return, deduct the reimbursement on the appropriate line of the return as provided in the instructions for that return. Per Diem and Car Allowances You can reimburse your employees under an accountable plan based on travel days, miles, or some other fixed allowance. In these cases, your employee is considered to have accounted to you for the amount of the expense that doesn’t exceed the rates established by the federal government. Your employee must ac- tually substantiate to you the other elements of the expense, such as time, place, and business purpose. Federal rate. The federal rate can be figured using any one of the following methods. 1. For car expenses: a. The standard mileage rate. b. A fixed and variable rate (FAVR). 2. For per diem amounts: a. The regular federal per diem rate. b. The standard meal allowance. c. The high-low rate. Car allowance. Your employee is considered to have accounted to you for car expenses that do not exceed the standard mileage rate. Be- ginning in 2018, the standard business mileage rate is 54.5 cents per mile. You can choose to reimburse your employ- ees using an FAVR allowance. This is an allow- ance that includes a combination of payments covering fixed and variable costs, such as a cents-per-mile rate to cover your employees' variable operating costs (such as gas, oil, etc.) plus a flat amount to cover your employees' fixed costs (such as depreciation, insurance, etc.). For information on using an FAVR allow- ance, see Revenue Procedure 2010-51, availa- ble at IRS.gov/irb/2010-51_IRB#RP-2010-51, and Notice 2018-03, available at IRS.gov/irb/ 2018-02_IRB#NOT-2018-03. Per diem allowance. If your employee ac- tually substantiates to you the other elements (discussed earlier) of the expenses reimbursed using the per diem allowance, how you report and deduct the allowance depends on whether the allowance is for lodging and meal expenses or for meal expenses only and whether the al- lowance is more than the federal rate. Regular federal per diem rate. The regu- lar federal per diem rate is the highest amount the federal government will pay to its employ- ees while away from home on travel. It has the following two components. 1. Lodging expense. 2. Meal and incidental expense (M&IE). The rates are different for different locations. See GSA.gov/perdiem for the per diem rates in the continental United States. Standard meal allowance. The federal rate for M&IE is the standard meal allowance. You can pay only an M&IE allowance to em- ployees who travel away from home if: • You pay the employee for actual expenses for lodging based on receipts submitted to you, • You provide for the lodging, • You pay for the actual expense of the lodg- ing directly to the provider, • You don’t have a reasonable belief that lodging expenses were incurred by the employee, or • The allowance is figured on a basis similar to that used in figuring the employee's wa- ges (that is, number of hours worked or miles traveled). Per diem rates online. You can access per diem rates at GSA.gov/perdiem. High-low method. This is a simplified method of figuring the federal per diem rate for travel within the continental United States. It eliminates the need to keep a current list of the per diem rate for each city. Under the high-low method, the per diem amount for travel during January through Sep- tember of 2018 is $284 ($68 for M&IE) for cer- tain high-cost locations. All other areas have a per diem amount of $191 ($57 for M&IE). The high-cost localities eligible for the higher per diem amount under the high-low method are lis- ted in Notice 2018-77, available at IRS.gov/irb/ 2018-42_IRB#NOT-2018-77. Effective October 1, 2018, the per diem rate for high-cost locations increased to $287 ($71 for M&IE). The rate for all other locations in- creased to $195 ($60 for M&IE). For October, November, and December 2018, you can either continue to use the rates described in the pre- ceding paragraph or change to the new rates. However, you must use the same rate for all employees reimbursed under the high-low method. For more information about the high-low method, see Notice 2018-77, available at IRS.gov/irb/2018-42_IRB#NOT-2018-77. See GSA.gov/perdiem for the current per diem rates for all locations. Reporting per diem and car allowances. The following discussion explains how to report per diem and car allowances. The manner in which you report them depends on how the al- lowance compares to the federal rate. See Ta- ble 11-1. Allowance less than or equal to the fed- eral rate. If your allowance for the employee is less than or equal to the appropriate federal rate, that allowance isn’t included as part of the employee's pay in box 1 of the employee's Form W-2. Deduct the allowance as travel ex- penses (including meals that may be subject to the 50% limit, discussed later). See How to de- duct under Accountable Plans, earlier. Allowance more than the federal rate. If your employee's allowance is more than the ap- propriate federal rate, you must report the al- lowance as two separate items. Include the allowance amount up to the fed- eral rate in box 12 (code L) of the employee's Form W-2. Deduct it as travel expenses (as ex- plained above). This part of the allowance is treated as reimbursed under an accountable plan. Include the amount that is more than the federal rate in box 1 (and in boxes 3 and 5 if they apply) of the employee's Form W-2. De- duct it as wages subject to income tax withhold- ing, social security, Medicare, and federal un- employment taxes. This part of the allowance is treated as reimbursed under a nonaccountable plan as explained later under Nonaccountable Plans. Meals and Entertainment Under an accountable plan, you can generally deduct only 50% of any otherwise deductible business-related meal and entertainment ex- penses you reimburse your employees. The de- duction limit applies even if you reimburse them for 100% of the expenses. Application of the 50% limit. The 50% de- duction limit applies to reimbursements you make to your employees for expenses they in- cur for meals while traveling away from home on business and for entertaining business cus- tomers at your place of business, a restaurant, or another location. It applies to expenses in- curred at a business convention or reception, business meeting, or business luncheon at a club. The deduction limit may also apply to meals you furnish on your premises to your em- ployees. Page 44 Chapter 11 Other Expenses