The question comes up in different forms, but essentially it is the same- people want to know how to compute per diem allowances, how to deduct them on their tax returns, and what is the net-net of all the hoopla. Here we go-
The government has established the costs for lodging, meals and incidentals throughout the United States (referred to as CONUS for contiguous states, and OCONUS for Alaska, Hawaii, etc.) and throughout the international community. These rates typically come in two forms- (a) lodging, and (b) meals and incidentals expense (M&IE).
Pilots and flight attendants are typically only interested in the meals and incidentals portion of the per diem allowance since the company pays for the lodging. In addition most flight crew are paid an hourly rate for their time away from base, which is used to offset the costs of traveling. However in most cases the airline falls short and does not pay for the full amount of per diem allowed. This difference when aggregated over the year becomes your deduction on your tax return.
Let’s look at an example. You show for work at 1100, overnight in ASE and get released at 1300. You were away from base for 26 hours, and were paid $1.65 per hour for a total of $42.90. ASE allows $71 towards meals and incidentals per night. Since you had a partial day on either side of the overnight, your total allowance is actually $106.50 ($71 x 2 x ¾-day). Therefore you have a shortfall, or gap, of $63.60. This computation method is considered the city-by-city method (in this example, the standard daily rate would be much lower).
To recap- the IRS has allowed you to deduct $106.50. The company paid you $42.90 (bummer). Therefore your deduction has been reduced because of a partial reimbursement to $63.60.
What do you do with this number? Typically if you were a regular, garden-variety employee, you would only be able to deduct 50% of the $63.60. However, if you are subjected to Department of Transportation (DOT) rules regarding duty limitations and rest requirements then you may deduct 80% of the $63.60. Pilots, flight attendants, truck drivers, railroad engineers, etc. are all subjected to DOT regulations.
As an aside, the more efficient the trip and / or the higher the per diem allowance (such as Southwest), the smaller the per diem deduction will be.
In reviewing prior tax returns from CPAs who did not fully understand the per diem calculation and deduction, we found errors in three areas-
1. the incorrect computation of the per diem allowance
2. the failure to apply the per diem paid by the company and
3. the misapplication of the 50% / 80% rule for DOT employees.
All three of these areas are important for an accurate and comprehensive tax return.
There is also a standard daily rate which varies depending on the quarter and on the destination (domestic versus international). If you fly to a lot of smaller domestic cities, the standard daily rate will generally provide a larger deduction. If you do any international flying at all, even Canada, the city-by-city method is better. You must pick a horse so-to-speak, and apply the same method to the entire year. If we prepare your taxes, we compute your per diem deduction using both methods and use the one which yields the largest deduction.
What is the net-net of deducting per diem allowances correctly? Most domestic crewmembers who work an average of 15 days per month will have a per diem allowance of around $9,000. Most airlines will reimburse approximately $5,500. Therefore your deduction is $2,800 (80% of $3,500 per DOT rules) which at a tax rate of 15% equals $420 in your pocket. International crewmembers can easily see a $10,000 deduction which is $1,500 in your pocket.
Seniority is everything as they say.
CONUS per diem rates are obtained from the US GSA Office.
The IRS reprints CONUS information in Publication 1542. Re-prints will not continue past 2012.
International per diem rates are obtained from the US State Department.
Please visit our website to use our free Per Diem Calculator and review a comparison of the standard daily rate and the city-by-city methods of per diem calculation. We also have legacy spreadsheets from the IRS and State Department for prior year per diem allowances.
Jason Watson is an airline pilot for SkyWest Airlines based in DEN. He the liaison for all flight crew related taxes, including pilot taxes and flight attendant taxes. Having owned rental properties for over 15 years, Jason can also answer questions regarding rental property taxes, depreciation issues and passive loss limitations.
The Watson CPA Group is a progressive tax consultation and preparation firm embracing internet technology to provide worldwide tax service from offices in Colorado USA. A secure online Client Portal allows remote taxpayers to exchange financial information, tax documents and tax returns saving valuable time and resources.
Since 1997, we’ve been a team of Colorado Springs CPAs preparing individual and corporate tax returns for a flat fee, and specializing in LLCs, small business and corporate taxes, pilot and flight attendant tax deductions, per diem deductions, rental property owners and expat tax clients.
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