How does per diem work?
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. If the airline could get away with crewmembers paying for their own hotel room they would. But we digress.
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 per diem 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 $1.80 (as an example) per hour for a total of $46.80. ASE allows $71 towards meals and incidentals per night. Since you had a partial day on either side of the overnight, your total per diem allowance is actually $106.50 ($71 x 2 x ¾-day). Therefore you have a shortfall, or gap, of $59.70. 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 $46.80 (bummer). Therefore your per diem deduction has been reduced because of a partial reimbursement to $59.70.
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 $59.70. However, if you are subjected to Department of Transportation (DOT) rules regarding duty limitations and rest requirements then you may deduct 80% of the $59.70. 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. For example, Southwest pays $2.15 per hour for per diem on a three day trip. Time away from base might be 60 hours, or a total of $129 in per diem reimbursement. Two overnights in SFO will have a $177.50 per diem allowance. In this example, you have a $48.50 deduction before the 80% application. This could become a whopping $1,940 deduction. Very low compared to other inefficient airlines or airlines with a low per diem reimbursement.