Introduction

The Tax Cuts and Job Acts (TCJA) was ratified at the end of 2017 and placed into effect beginning with the 2018 tax year. Specific to unreimbursed employee expenses, the changes affect allowances in many industries; namely, a suspension of itemized deductions which includes meal and travel costs that are subject to the 2% adjusted gross income (AGI) floor. However, a provision of the tax code gives taxpayers, who are subject to the U.S. Department of Transportation’s (DOT) “hours of service” rules, two standardized per diem rates per day (which covers meals and incidental expenses) for time spent away from their tax home (IRS Notice 2018-77). The deductible amount is limited to 80% of the total per diem for eligible taxpayers.

According to IRS Notice 2018-77, the “Special Per Diem Rates” are $66 within the continental US (CONUS) and $71 outside the continental US (OCONUS). These rates took effect on October 1, 2018. (From January 1, 2018 through September 30, 2018, the per diem rates were $63 for CONUS and $68 for non-CONUS travel.) Taxpayers that are subject to these hours of service rules substantiate their travels by retaining all applicable documentation including their logbooks for tax purposes.

The purpose of this article is to illustrate the overall tax effects of the per diem deduction at the individual taxpayer level for those subject to DOT hours of service rules. (To simplify these illustrations, the trucking industry is the focus of the remainder of this article.) Motor carriers and self-employed drivers (owner-operators) subject to DOT’s hours of service rules can claim deductible business expenses. However, company truck drivers are no longer eligible to do so as of January 1, 2018. For the purpose of illustrating the tax effect of the current per diem rates, we present three compensation models: two for employees and one for an owner-operator. In the first model, we assume our company driver has $60,000 in total taxable wages (box 1 of the W-2), no deductions for AGI, 300 qualifying days away from home in the CONUS, no other eligible Schedule A deductions, no state income taxes withheld, no benefits or other withholdings paid by the employee, and a filing status of single with no dependents. Because unreimbursed employee expenses are no longer permitted as an itemized deduction for company drivers, the tax effect of this change is illustrated below by contrasting the old law with the current law. In the second model, we assume that the sum of the per diem expense reimbursement and taxable wages for our company driver equals $60,000; all of the other assumptions with Model 1 remain intact. In the third model, we assume that our owner-operator’s profits, the days away from home are identical to those of our company drivers, and no other changes to the first model’s assumptions. The 2019 values for the income tax rates and the standard deduction were obtained from IRS Revenue Procedure 2018-57.

During the past several years, company drivers had two compensation models. One model involved the wages and no reimbursement or compensation from the firm for the per diem expenses. Under that model, the company driver would itemize any per diem deduction as an unreimbursed employee expense. The main advantages to this model are that it increases the amount of income subject to Social Security taxes (which increased the company driver’s future Social Security benefits), and it shifts the loss of any nondeductible portion of the per diem expense to the driver. In other words, this model simplifies the payroll and accounting processes at the employer’s level. The tax effect of this model under the current rules is presented below.

Model 1 illustrates that the tax consequences of the loss of being able to deduct the per diem expense is estimated to be $536.80 even though the effective tax rate is estimated to be slightly less under the current tax law. In both cases, this company driver is in the 22% federal tax bracket.

The second compensation model offered by trucking companies included a combination of per diem and wages. The combined value of these two was normally identical to the taxable value offered under Model 1. As seen below, Model 2’s compensation structure has an immediate benefit to the company driver, and it allows the employer to save on its portion of Social Security taxes as well, which is estimated to be $1,514.70 (= $4,590 - $3,075.30). Relative to Model 1, Model 2 confirms that our company driver would be in a lower tax bracket (12% vs. 22%) and realize a lower effective tax rate and an estimated tax savings of $4,723.20 (= $10,964.50- $6,241.30) under the current tax law. The primary long-term disadvantage to Model 2 is our company driver will receive lower future Social Security benefits due to less compensation that is subject to Social Security taxes. Both the employer and the employee benefit via Model 2.

For those who are self-employed in the trucking industry, Model 3 best demonstrates the tax effect of the per diem deduction. This basic model was not changed by the current tax law. Under our assumptions, our Model 3 taxpayer is in the 12% federal income tax bracket and has a clear after-tax cash advantage over a Model 1 taxpayer. The increase in Social Security taxes experienced by a Model 3 taxpayer is a direct result of having to pay both the employer and the employee portions of the Social Security taxes on earned income. (An employee, such as illustrated by Model 1 or Model 2, only pays half of the total Social Security taxes from their wages and their employer pays the other half.)

Since a per diem deduction is no longer available for employees on an individual taxpayer’s federal income tax return, many employers now need to decide if and how they will change their employee compensation model to address their employees’ loss of the per diem deduction. By showing their current and prospective employees how such a change in compensation benefits them now, employers should have little difficulty navigating this transition. Some providers in the trucking industry, like Schneider National, appear to be doing exactly this (see Pat Lilja’s “2019 truck driver per diem pay: advantages and tax plan impacts” on Schneider National, Inc.’s website).

Candelaria Zepeda is a graduate student of the LaPenta School of Business at Iona College of New Rochelle, NY. She received her MBA in General Accounting in May 2019. She is on the path to getting her EA and then become a CPA. Her intended career is one within the field of taxation. Candelaria’s experience as a sales representative provided her with strong teamwork, communication, and organization skills– skills that are versatile and can be applied to any work environment. Candelaria’s experience as a childcare provider included educational services. Providing math, language, and reading skill development offers her the ability to communicate effectively while providing a supportive and nurturing yet disciplined environment. The dynamicity of this work environment developed her ability to adapt to changing environment as well as honed her communication skills.

Andrew S. Griffith, DBA, EA, CPA, CMA, CIA, CFE, CRMA, is an associate professor of accounting in the LaPenta School of Business at Iona College of New Rochelle, NY. He is also the current chair of the Human Subjects/Institutional Review Board (IRB) and an advisor to the Honors Program at Iona College. He has spent several years working with the trucking industry including almost 14 years’ experience as tax professional and consultant, almost two years’ experience as an expense manager, and one year’s experience as an internal auditor. Additionally, he was a board member and treasurer of a county-owned hospital authority for more than a year. His publications can be found in various academic journals and trade magazines including The CPA Journal. He can be reached at agriffith@iona.edu.