In general, personal expenditures such as food and lodging are not tax deductible. However, a taxpayer may deduct these costs while he or she is away from home overnight for business purposes. Instead of deducting actual expenditures, taxpayers can use the per diem amounts for food and lodging in revenue procedure 93-50. The applicability of this revenue procedure to self-employed individuals recently came before the courts.
Paul Duncan was an independent over-the-road truck driver who lived in Tazewell, Tennessee. He contracted all his cargo-hauling assignments from Knox Cartage in Knoxville. In 1994 he traveled 130,000 miles. On his 1994 tax return, he deducted food and lodging expenses for away-from-home travel based on the per diem amounts in revenue procedure 93-50. He also deducted the cost of meals for days he stayed in Knoxville to obtain a cargo. The IRS denied the deductions.
Result. For the IRS. IRC section 162(a)(2) permits taxpayers a deduction for travel expenses such as food and lodging when they are away from home overnight. Section 274(d) limits the deduction to amounts for which a taxpayer has the necessary substantiation. Therefore, a taxpayer may not rely on the “Cohan rule,” which allows him or her to estimate expenditures. While taxpayers can use the per diem amounts found in revenue procedure 93-50 to ease their administrative burden, they must otherwise comply with all of the code’s substantiation requirements.
The revenue procedure limits the use of per diem amounts for lodging to cases where an employer reimburses an employee with a fixed daily amount. That means self-employed individuals may not use this method for lodging expenditures. Instead, they must prove actual expenses based on the rules of section 274(d). Duncan could not deduct any lodging expenditures because he did not have the required proof. Self-employed individuals may use the per diem amounts for meals since the revenue procedure specifically authorizes them to do so. In this case Duncan was allowed to deduct such per diem amounts.
Duncan deducted meals in Knoxville on days he stayed over to obtain a cargo the next day. The law requires truckers to rest 8 hours in a 24-hour period. Duncan argued he needed to stay in Knoxville to meet this requirement and to obtain a cargo. Had he taken the time to drive to his house, he would not have been able to leave as early the next morning and the cargo would have gone to another trucker. The Tax Court rejected Duncan’s “need to rest” argument. For tax purposes, your home is where your principal business takes place, not your residence. In this case Knoxville, not Tazewell, was Duncan’s home. Since he was not away from home, he could not deduct the cost of meals while he was in Knoxville.
Self-employed individuals must carefully substantiate all out-of-town travel expenses. They may use the listed per diem amounts only for food. Lodging deductions must be for the actual amount spent. Failure to comply will result in a complete denial of the deduction.
Paul H. Duncan, TC Memo 2000-269.
Prepared by Edward J. Schnee, CPA, PhD, Joe Lane Professor of Accounting and director, MTA program, Culverhouse School of Accountancy, University of Alabama, Tuscaloosa.