Allow the Full Deductibility of Per Diem Allowances in Construction
- Section 274(n) of the Internal Revenue Code currently provides that 50 percent of the amount paid for meals and entertainment are non-deductible business expenses. The IRS has issued Revenue Procedure 2000-39, which sets federal per diem amounts for various locations. The federal per diem is made up of two elements—lodging, and meals and incidentals. The revenue procedure provides that absent an accounting to the employer by the employee, the employer may treat 40 percent of the per diem, if less than the federal per diem, as meals and incidentals. This 40 percent is then subject to the non-deductible provisions of Code section 274(n). Therefore, 20 percent of the employer paid per diem is non-deductible. The revenue procedure does not address a “lodging only” per diem.
- The Payment of Per Diems is an Ordinary and Necessary Business Expense. Employers do not have an option regarding the payment of per diems as this is standard practice in the industry. With the scarcity of skilled workers in any given job location, employers frequently have to bring in labor from outside the given area. It is not an excess perk for employees. Per diem expenses can represent a significant cost to construction contractors.
- Congress Should Provide for a Lodging-Only Per Diem. Congress should exclude construction workers’ per diems from the provisions of Code section 274(n) by creating a lodging-only per diem. The federal government currently has its own lodging-only per diem for federal government workers, and all employers should be able to benefit from this schedule, not just the government. The provision of Code section 274(n) would continue to apply to non-per diem meals and entertainment.
- The Employer Cannot Report the Per Diem as Additional W-2 Compensation to a Union Employee. Many construction employees are union members and their collective bargaining agreement precludes the employer from reporting the per diem on the members’ W-2s. Most contractors pay less than the federal per diem and expressly expect the per diem to be used by the employee to be paid for lodging, as written in employee handbooks.