Updates to IRS Rules for Using Per Diem Rates

The IRS has updated its previous guidelines for how businesses, self-employed individuals and qualified employees can substantiate their business travel expenses for tax purposes using the per diem rules. The guidance in Revenue Procedure 2019-48 modifies 2011 guidance to reflect changes made by the Tax Cuts and Jobs Act (TCJA).

While the per diem rules themselves haven’t changed significantly, they were updated to conform to the TCJA. RP 2019-48 mainly deletes guidance for taxpayers who, before the TCJA, were allowed to deduct certain unreimbursed business travel expenses. Read more about what changed under the TCJA.

Business Expenses under the TCJA

The part of the tax code that generally disallowed a business’s deductions for expenses related to entertainment, amusement or recreation incurred or paid after December 31, 2017 has been amended. A business can still claim deductions for employees’ reimbursed business travel expenses for lodging, meals and certain incidentals. Food and beverage expenses related to business travel away from home are still subject to a 50% limit. (Different rules and rates apply to the transportation industry.)

Also, all miscellaneous itemized deductions that are subject to the 2% floor until 2026, including most deductions for employees’ unreimbursed business travel expenses are suspended. However, self-employed taxpayers and qualified employees (military reservists and certain state or local government officials, educators, and performing artists) can continue to deduct unreimbursed expenses for travel away from home.

All such expenses, whether claimed on a business’s or an individual’s tax return, must be substantiated. Rules for using a per diem rate to substantiate an employee’s lodging meal and incidental expenses — or meal and incidental expenses only — that a payer (an employer, its agent or a third party) reimburses are provided in Rev. Proc. 2019-48. To substantiate their unreimbursed expenses for business travel, self-employed individuals and qualified employees may use the rules.

The guidance makes clear that neither businesses nor individuals must use the methods described. They can instead substantiate actual allowable expenses if they maintain adequate records.

Rules Regarding Per Diem

When a business pays a per diem allowance for lodging, meal and incidental expenses, the amount considered substantiated for each calendar day equals the lesser of 1) the per diem allowance, or 2) the amount computed at the federal per diem rate for the relevant location (generally, the U.S. General Services Administration’s per diem rate for federal workers who travel, which varies by location and time of year). Note that incidental expenses are limited to fees and tips given to porters, baggage carriers, bellhops and hotel staff.

If the employee provides time, place and business purpose substantiation, (receipts are not required), the per diem is treated as made under an accountable plan, meaning it is not reported as wages or other compensation or subject to employment tax withholding and payment.

If the business pays a per diem allowance only for meal and incidental expenses (M&IE), the amount substantiated for each calendar day is the lesser of 1) the allowance for that day, or 2) the amount computed at the federal M&IE rate for the location for that day or partial day.

A per diem allowance is treated as paid for M&IE only if:

• The business pays the employee for actual expenses for lodging based on receipts
• The business provides the lodging
• The business pays the actual lodging expenses directly to the lodging provider
• The business doesn’t have a reasonable belief that the employee will or did incur lodging expenses
• The allowance is computed on a basis similar to that used to compute an employee’s compensation (for example, hours worked or miles traveled)

The time, place and business purpose of the travel must be substantiated by employees.

By using an amount computed at the federal rate for the location of each calendar day or partial day of travel, self-employed individuals and qualified employees can substantiate their deductions for M&IE. The individual or employee also must document the time, place and business purpose.

If such individuals have incidental expenses but no meal expenses for a calendar day or partial day, they can use the $5 per day incidental-expense-only rate. It, too, will be considered substantiated with documentation of the time, place and business purpose of the travel.

High-Low Substantiation Method

A business that pays a per diem can alternatively use the high-low method to substantiate lodging, meal and incidental expenses for M&IE only. However, employees and self-employed individuals aren’t permitted to use this method instead of the M&IE deduction method described above.

A uniform high rate applies to all of the designated high-cost locations and a low rate to every other location in the continental United States under the high-low method. The appropriate rate applies as if it were the federal per diem rate for the location, so the amount of expenses substantiated for each calendar day equals the lesser of the actual per diem allowance for that day or the applicable high-low rate.

As of October 1, 2019, the federal per diem rates for high-low purposes are:

• $297 for travel to any high-cost location, including $71 for M&IE
• $200 for travel to any other location in the continental United States, including $60 for M&IE
• $5 per day for incidental expenses only

The high-cost locations for 2019-2020 are listed under IRS Notice 2019-55 and includes some changes from the previous year’s list. Transition rules apply in the final three months of a calendar year.

Businesses that use the high-low substantiation method for an employee must apply the method for all amounts paid to that employee for travel away from home within the continental United States during the calendar year. It can use any permissible method of reimbursement.

Act Now

The new guidance applies to per diem allowances for lodging, meal and incidental expenses, or M&IE only, paid to an employee on or after November 26, 2019, for travel on or after that date. For self-employed individuals and qualified employees who travel, it is effective for meal and incidental expenses or incidental expenses only paid or incurred on or after the same date. For questions regarding employees and their daily expenses, contact us today.

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