I think the 'Per Diem' may be the most misunderstood concept in all of tax reporting (with auto mileage being a close second). There are some basic rules that apply to everyone, but then there are random exceptions.
The best way to start out is to understand what a 'Per Diem' is. Literally, it means 'Per Day'. But for tax reporting purposes, the 'Per Diem' method of reporting is basically an optional way to report travel & meals/incidental (M/I) expenses on a 'Per Day' basis (the other reporting option is to report actual dollars spent).
The 2 classifications of Per Diems are:
M/I Per Diem
The M/I Per Diem reporting amounts are based on the # of days traveling and where you happen to be eating while traveling. - www.GSA.gov is the authority on the rates you can use, it has a list of all the rates for each state, for reference.
Exception: if your meals are paid for by someone else while traveling, you can still use the Per Diem option of reporting but would have to exclude the amount of the meal provided for you in the calculation (for example, you would report a % of the allowable Per Diem rate to only include the other 2 meals that day)
Exception: The first and last day you travel, the Per Diem is generally calculated at 75% of the full rate. Refer to General Services Administration (GSA) to obtain the specific Per Diem rates. If you are traveling abroad, you will be able to find your Per Diem rate by visiting the State Department website.
Note: whether you report M/I Per Diem or actual M/I expenses, they are still only 50% deductible.
Travel Per Diem
The travel Per Diem reporting option is also based on days traveling and where you happen to be traveling. However, again, not for sole proprietors, they must use actual $ spent.
The best way to see this is by using an example:
You are an employee of Google. You are from Chicago. You go to a conference in San Francisco for 3 days.
While traveling you also spend on M/I (there are no meals provided at the conference):
So, what Per Diem reporting options do you have, as an employee of Google, for getting reimbursed (that Google will then report on their taxes)?
Well, you first look up the Per Diem amounts for SF at this website:
M/I Per Diems are $74/day
Travel Per Diems are $250/day
Remember to only calculate 75% of day 1 (traveling to) and day 3 (traveling from) -check the www.GSA.gov for specific rules. So, the M/I Per Diem amount for 3 days of travel is: $185 or (74 + (2 x .75 x $74)). Since you only actually spent $43 on M/I, you're going to report the M/I Per Diem amount of $185 to get the best allowable benefit.
But since your actual travel of $1,550 was greater than the allowable Travel Per Diem: $625 ($250 + ($250 x .75 x 2)), you are going to report your actual travel expenses of $1,550.
I hope this example helps. There are many, many exceptions involved with Per Diem reporting, so before applying it, use the GSA resource website to dig into the rules and exceptions of your specific situation.
Good luck and safe travels.
For more resources check out:
Question: What Per Diem reporting option do you have if you were a Single Member LLC reporting on your Sch. C for personal taxes?
Answer: Only the M/I Per Diem option. Travel has to be calculated at actual expenses. See shaded area below for Per Diem reporting area on Sch. C: