Which method should I use? City By City or Standard Daily Rate?
There are two ways to calculate your per diem allowance- standard daily rate and city by city. Each has its advantages. Domestically, either method might yield the best result however if you fly a lot of international pairings, city by city is clearly the best option, hands down.
Per diem rates are broken down into three parts-
|CONUS||Per diem rates are published by the US GSA Office and also re-printed by the Department of Defense. The DOD is a bit more expansive, but technically they are the same. The IRS used to update Publication 1542 based the US GSA Office rates, but they have discontinued as of May 2012. Publication 463 details the standard daily rate for transportation workers (airline, truck drivers, etc.).|
|OCONUS||Per diem rates for Hawaii, Alaska and US territories are published by the Department of Defense.|
|International||Per diem rates for international destinations are publish by the US Department of State and the Department of Defense. Again, the DOD is a bit more expansive, but they are technically the same.|
Several per diem allowance rates exist, and it is important to choose the correct one. For example, Aspen (ASE) currently has a $288 per diem allowance (during ski season of course), but this includes lodging which is typically paid for by the airline. The amount associated with Meals and Incidentals Expense (M&IE) is only $71 per night. This is using the city by city method.
Conversely, the FY2013 and FY2014 standard daily rate is $59 for domestic destinations and $65 for international. At times it changes slightly for Oct, Nov and Dec and international destinations depending on COLA increases, etc. Fiscal year 2014 starts October 1 2013. Silly government stuff.
3/4 Day Convention: Per diem allowance will automatically get adjusted to a 3/4-day for the beginning and end of your trip, and your last overnight will be used to compute the per diem for the last day of your trip (return to base). Regardless of what you have read in IRS Publication 463, the Tax Court and industry practices typically apply the 3/4-day convention to the first and last day. Yes, you can use any method that is reasonable and applied consistently, but keep reading below.
Some per diem calculators break it down by the hour, but using a 3/4-day convention will consistently provide larger allowances. In the theory of large numbers, your start and end times will generally move towards the middle of the workday, or a 1/2-day. So using a 3/4-day will give you larger deductions without the mental gymnastics.
Having said that, if you consistently fly the same pairings, and the pairings have unusual show and release times, we’ll take that into account if it is to your advantage to do so. For example, maintenance domiciles or out-station type domiciles will see early show times and / or late release times. International pairings have some nuances too.
Here are some examples-
|Overnights||City by City Per Diem||Standard Daily Per Diem|
|ASE, SFO, ORD||$53.25 + $71 + $71 + $53.25 = $249||$39 + $52 + $52 + $39 = $182|
|ASE, GRB, SFO||$53.25 + $46 + $71 + $53.25 = $224||$39 + $52 + $52 + $39 = $182|
|FAR, GRB, FSD||$34.50 + $46 + $46 + $34.50 = $161||$39 + $52 + $52 + $39 = $182|
As you can see, each method has its advantages. If you fly to a lot of smaller cities, generally speaking the standard daily rate is preferred versus a mix of larger and smaller cities. Don’t let Fargo, Green Bay and Souix Falls pursuade your bidding preferences.
If you fly internationally even occasionally, the city by city method is generally preferred. Heck, LHR is over $180 per night. International destinations currently have larger per diem allowances since the currency exchange rate between the US dollar and foreign currency favors other currencies. In other words, the US dollar is weak right now. And at times international destinations are just expensive regardless of the currency.
You can only use one method for the entire tax year. So, you cannot switch back and forth between pairings. WCG (formerly Watson CPA Group) will compute your per diem using both methods, and use the per diem allowance with the greatest deduction. We also compute your duty daily percentages for deducting cell phone and internet expenses. See our KB article on deducting these expenses for your reading pleasure.