Per diem can be tax minefield

user-gravatar Headshot

Environmental Protection Agency and the Small Business Administration now offer loans to purchase SmartWay Upgrade Kits – a collection of fuel-saving technologies supported by the SmartWay Transport Partnership program. Using SBA Express Loans, small trucking firms can borrow from $5,000 to $25,000, with no collateral, an online or telephone application and flexible loan terms. For more information, visit this site.

New York Thruway Authority voted to stop collecting tolls in Buffalo, which had been the only town with Thruway tollbooths within its city limits. Developer Carl Paladino had filed a lawsuit to end the tolls, arguing that the tolls became illegal under state law in 1996, when the federal government reimbursed the Thruway for the cost of the decades-old tollbooths. No plans exist to remove further Thruway tolls.

J. Bauer Trucking received $120,000 in tax credits through Wisconsin’s Enterprise Development Zone program to help fund a $1.7 million expansion. The Medford-based company will create jobs with the construction of a new truck repair shop and the purchase of related equipment.

Fleet One – a provider of financial service solutions to companies with fleets of vehicles and the merchants that serve them – has announced a contract with Murphy Oil Corp. to provide Fleet One Local fuel cards for all Murphy USA store locations in the United States.

In my experience as a CPA, I’ve learned that there are few industries as financially complex as interstate trucking. In one area, however, the Internal Revenue Service has long offered motor carriers recordkeeping relief. In reimbursing employee expenses, trucking companies can pay a flat per diem amount rather than having to track and substantiate actual employee expenses. Recently, IRS increased the maximum per diem rate for truck drivers that is deemed substantiated – in other words, no proof of actual expenses is needed – to $52 from $41. And the per diem is now deductible at 75 percent of that total rather than the previous 70 percent.

Many carriers offer per diem pay as an alternative pay package because the payments are exempt from FICA, Social Security and Medicare taxes. For drivers, this is a lot of money. It’s also a lot of money for the U.S. Treasury, so the IRS is watching for abuse.

Robert Everitt, the trucking industry’s technical adviser for the IRS, points to a minefield of potentially sticky situations. At issue is when an “accountable plan” (per diem reimbursement plan) goes beyond the intent of per diem and begins to constitute income. Problems arise due to how carriers often pay per diem.

Trucking companies don’t want to pay a full per diem to every driver every day; doing so would mean giving money to drivers who barely worked on a given day. So carriers often pay per diem on the basis of cents per mile or percentage of the load. The problem is that the driver could receive more than $52 per diem on days when he exceeds the average number of miles or carries high-paying loads.

Last month, IRS addressed this issue in Revenue Ruling 2006-56. In a nutshell, if your per diem reimbursement plan has no mechanism or process for tracking allowances paid and you routinely pay more than the $52 limit, your plan will be deemed nonaccountable – meaning all payments are normal, taxable compensation – unless you treat the excess amount as normal wages or have a mechanism for requiring drivers either to substantiate their actual expenses or repay the excess amount.

It’s critical, therefore, that your system is structured so that you don’t pay drivers more than $52 in per diem. Everitt says there is really only one solution for carriers using or contemplating a per diem-based pay structure: Make sure your systems – or your drivers – keep detailed records of everything.

By linking dispatch management systems with payroll systems, trucking companies may be able to simplify and stay on top of the recordkeeping burden. Software records when the driver began driving, where he went, what loads he picked up and where they were delivered, which proves business purpose for the trip and that he was away from home overnight. The software also shows when he got home, which is when per diem stops.

If you don’t use automated systems to track per diem expenses, your drivers’ own records will be needed to back per diem pay with actual expenses incurred. Failure to keep detailed records may be disastrous come April 15 – or audit time. And the recordkeeping burden is significant. By law, you must be prepared to substantiate the expense amount, the time and place of travel and the business purpose of travel.

The potential recordkeeping nightmares aside, per diem-based pay is attractive if your driver lives in a state that does not allow meals and incidentals as a deduction on his state return. Those states are Alabama, Connecticut, Illinois, Indiana, Louisiana, Massachusetts, Michigan, New Jersey, Ohio, Wisconsin and West Virginia. It also can be attractive in situations where the driver rents his personal residence. But always make sure drivers understand how per diem pay works and that there might be consequences -slower accumulation of vacation pay, for example – for taking advantage of the tax advantages per diem pay offers.

Again, if you have a per diem reimbursement plan or are considering one, you need to understand the concerns of the IRS and especially the requirements of Revenue Ruling 2006-56. Consult a qualified CPA to steer clear of trouble with the feds and help you make an informed decision that will provide the best solution for your company.

Resources
The new IRS revenue ruling on excess per diem allowances is available by searching “Revenue Ruling 2006-56” at www.irs.gov. A brief summary is available by searching “IR-2006-175.” The revenue ruling is explained in greater detail in Internal Revenue Bulletin 2006-46, available at issue is explainA more detailed summary called an Internal Revenue Bulletin is available at this site.

Information on per diem rates as of February 2006 is available by searching “Publication 1542” at this site.

“One Man’s Journey into Per Diem Land,” a fictional story by Richard Bell, CPA. website