IRS Updates Per Diem Guidance to Reflect Tax Cuts and Jobs Act Changes

The IRS has updated its principal guidance on per diems—daily amounts that, subject to periodically adjusted limits (see our Checkpoint article), may be used in lieu of actual expense amounts to determine nontaxable travel allowances or reimbursements, or to substantiate travel expense deductions. The rules were previously set out in Revenue Procedure 2011-47 (see our Checkpoint article), but the Tax Cuts and Jobs Act (TCJA) suspended miscellaneous itemized deductions for taxable years after 2017 and before 2026, and generally eliminated the deduction for entertainment, amusement, and recreation expenses (see our Checkpoint article), rendering portions of Revenue Procedure 2011-47 obsolete. (The TCJA did not affect employers’ ability to reimburse employees’ business travel expenses on a nontaxable basis using the accountable plan rules, nor did it end the deduction for recreational, social, or similar activities that are primarily for the benefit of employees who are not highly compensated.)

The changes made by Revenue Procedure 2019-48 are limited. Obsolete provisions have been modified or deleted. The discussion of business travel expense deductions has been narrowed to focus on those employees—including qualified performing artists, fee-basis state or local government officials, eligible educators, and Armed Forces reservists—who can still take travel expense deductions because their deductions reduce their adjusted gross income (i.e., because the deductions are exclusions or “above-the-line” deductions, and not miscellaneous itemized deductions). The definition of incidental expenses has been revised to conform to the current definition in the federal travel regulations, which no longer refers to certain mailing costs and transportation to places where meals are taken, and simplifies the description of individuals whose tips are covered. And a new provision warns that payment arrangements will fail to satisfy the accountable plan rules if payments are made regardless of whether an employee incurs, or is reasonably expected to incur, deductible business expenses or other, bona fide, nondeductible expenses (a scheme often referred to as “recharacterization”). The revenue procedure is generally effective November 26, 2019, although the suspension of miscellaneous itemized deductions applies to taxable years beginning after 2017 and before 2026, and the disallowance of deductions for expenses with respect to entertainment, amusement, or recreation applies to amounts incurred or paid after December 31, 2017.

EBIA Comment: The modest changes to the per diem rules resemble those made to the IRS’s mileage rate guidance (see our Checkpoint article). Both focus on consistency with the TCJA, eliminating obsolete statements about the availability of miscellaneous itemized deductions, clarifying the continued availability of above-the-line deductions, and making only limited additional revisions (including new, identical warnings against recharacterizing wages to avoid tax.) With this cleanup accomplished, we suspect the IRS will now revisit its other travel guidance, including Publication 463 (Travel, Gift, and Car Expenses), which was updated for 2018 but retained some potentially confusing references to travel deductions (see our Checkpoint article). For more information, see EBIA’s Fringe Benefits manual at Section XXI (“Travel Expense Reimbursements”).

Contributing Editors: EBIA Staff.