IRS has issued a new notice carrying the “high-low” simplified per-diem rates for post-Sept. 30, 2018 travel. The high-cost area per-diem increases $3, and the low-cost area per-diem increases $4, from the prior simplified per-diems.
Background. An employer may pay a per-diem amount to an employee on business-travel status instead of reimbursing actual substantiated expenses for away-from-home lodging, meal and incidental expenses (M&IE). If the rate paid doesn’t exceed IRS-approved maximums, and the employee provides simplified substantiation (time, place and business purpose), the reimbursement is treated as made under an accountable plan—it isn’t subject to income- or payroll-tax withholding and isn’t reported on the employee’s Form W-2. Receipts of expenses aren’t required.
In general, the IRS-approved per-diem maximum is the General Services Administration (GSA) per-diem rate paid by the federal government to its workers on travel status. This rate varies from locality to locality. These rates in effect for the federal government’s fiscal year period beginning Oct. 1, 2018, may be found at http://www.gsa.gov. However, in applying the per-diem, M&IE, and incidental-expenses-only allowances, an employer may continue using the CONUS (continental U.S.) rates that were in effect for the first nine months of 2018 for CONUS expenses in all of 2018, instead of using the GSA rates that are effective Oct. 1, 2018, provided that the employer consistently uses those prior rates for the last three months of 2018. (Rev Proc 2011-47, Sec. 4.06; Notice 2018-77, Sec. 6)
Definition of incidental expenses. Rev Proc 2011-47, Sec. 3.02(3) provided that the term “incidental expenses” has the same meaning as in the Federal Travel Regulations, 41 C.F.R. 300-3.1, and that future changes to the definition of incidental expenses in the Federal Travel Regulations would be announced in the annual per-diem notice. On Oct. 22, 2012, the GSA published final regs revising the definition of incidental expenses under the Federal Travel Regulations to include only fees and tips given to porters, baggage carriers, hotel staff, and staff on ships. Transportation between places of lodging or business and places where meals are taken, and the mailing cost of filing travel vouchers and paying employer-sponsored charge card billings, are no longer included in incidental expenses. Accordingly, taxpayers using per-diem rates may separately deduct, if permitted (see below), or be reimbursed for, transportation and mailing expenses. (Notice 2018-77, Sec. 2)
Observation: Employee business expenses, such as unreimbursed transportation costs, are miscellaneous itemized deductions that are disallowed for tax years 2018 through 2025.
High-low rates. A payor that pays a per-diem allowance in lieu of reimbursing actual expenses an employee pays or incurs or will pay or incur for travel away from home may use the high-low substantiation method in lieu of the per-diem substantiation method or the M&IE-only method. (Rev Proc 2011-47, Sec. 5.01)
Under the high-low substantiation method, there is one uniform per-diem rate for all “high-cost” areas within CONUS, and another per-diem rate for all other areas within CONUS. Under the optional high-low method for post-Sept. 30, 2018 travel, the high-cost-area per diem is $287 (up from $284), consisting of $216 for lodging and $71 for M&IE. The per-diem for all other localities is $195 (up from $191), consisting of $135 for lodging and $60 for M&IE. (Notice 2018-77, Sec. 5.01)
Changes in high-low per-diem localities. The following changes have been made to the list of high-cost localities:
- . . . The following localities have been added to the list of high-cost localities: Sedona, Arizona; Los Angeles, California; San Diego, California; Vero Beach, Florida; Jekyll Island/Brunswick, Georgia; Duluth, Minnesota; Pecos, Texas; Moab, Utah; Cody, Wyoming. (Notice 2018-77, Sec. 5.03(a))
- . . . The following localities have changed the portion of the year in which they are high-cost localities: Oakland, California; Aspen, Colorado; Boca Raton/Delray Beach/Jupiter, Florida; Naples, Florida; Bar Harbor/Rockport, Maine; Boston/Cambridge, Massachusetts; Jamestown/Middletown/Newport, Rhode Island; Charleston, South Carolina; Vancouver, Washington; Jackson/Pinedale, Wyoming. (Notice 2018-77, Sec. 5.03(b))
- . . . The following localities have been removed from the list of high-cost localities: Mill Valley/San Rafael/ Novato, California; Steamboat Springs, Colorado; Petoskey, Michigan; Saratoga Springs/Schenectady, New York. (Notice 2018-77, Sec. 5.03(c))
- . . . The following localities have been redefined: Traverse City, Michigan no longer includes Leland; Bar Harbor, Maine now includes Rockport. (Notice 2018-77, Sec. 5.03(d))
Limitation. A payor that uses the high-low substantiation method for an employee must use that method for all amounts paid to that employee for travel away from home within CONUS during the calendar year. The payor may use any permissible method (actual expenses, the per-diem substantiation method, or the M&IE-only per-diem substantiation method) to reimburse that employee for any CONUS travel away from home. (Rev Proc 2011-47, Sec. 5.03)
Transition rules. For travel in the last three months of a calendar year: (1) a payor must continue to use the same method (per-diem method, or high-low method) for an employee as the payor used during the first nine months of the calendar year; and (2) a payor may use either the rates and high-cost localities in effect for the first nine months of the calendar year or the updated rates and high-cost localities in effect for the last three months of the calendar year if the payor uses the same rates and localities consistently for all employees reimbursed under the high-low method. (Rev Proc 2011-47, Sec. 5.04; Notice 2018-77, Sec. 6)
Employer’s deduction for high-low per-diem. A payor must treat M&IE allowances as a food and beverage expense that is subject to the 50% deduction limit on meal expenses. (Rev Proc 2011-47, Sec. 6.05) The percentage is 80% for food and beverage expenses of certain individuals (e.g., air transport workers, interstate truckers, bus drivers) during or incident to a period of duty subject to the hours-of-service limits of the Department of Transportation. (Code Sec. 274(n)(3))
Observation: Where the 50% deduction limit applies to food and beverages, an employer’s deduction for a high-cost-area per-diem is equal to $251.50 ($216 for lodging plus $35.50 (half of $71 M&IE)). For non-high-cost areas, the payor deducts $165 ($135 for lodging, plus $30 (half of $60 M&IE)).
Optional method for incidental-expenses-only deduction. Instead of using actual expenses in computing deductions for ordinary and necessary incidental expenses of away-from-home business travel, employees and self-employed individuals who don’t pay or incur meal expenses for a calendar day (or partial day) of travel away from home may, for post-Sept. 30, 2018 travel, deduct $5 per day (same as previous rate) for each calendar day (or partial day) the taxpayer is away from home. (Notice 2018-77, Sec. 4)This amount is deemed substantiated if the taxpayer substantiates the time, place, and business purpose of the travel for that day (or partial day). The incidental-expenses-only per-diem can’t be used by payors that use a per-diem or M&IE-only per-diem method (see below), or by employees or self-employed individuals who use the M&IE-only per-diem method. The incidental-expenses-only per-diem is not subject to the 50% deduction limit on business meals. (Rev Proc 2011-47,Sec.4.05; Rev Proc 2011-47, Sec. 6.05(5))
M&IE-only per-diem. Under some circumstances, an employee may receive a per-diem reimbursement only for his or her M&IE for travel away from home. If simplified substantiation is supplied (time, place, business purpose), and one of several conditions is met (e.g., payor provides lodging in kind or pays the service provider directly for lodging), the amount paid is deemed paid under an accountable plan as long as the rate does not exceed the federal M&IE rate for the locality of travel for the period when the employee is away from home. Similar rules apply to self-employed individuals who pay or incur meal expenses. (Rev Proc 2011-47, Sec. 4.03)
Transportation industry per diem. Effective Oct. 1, 2018, taxpayers in the transportation industry paying (or deducting) a per-diem only for M&IE may treat $66 (up from $63) as the M&IE rate for all localities within CONUS and $71 (up from $68) as the M&IE rate for all localities outside of CONUS (same as previously). (Notice 2018-77, Sec. 3) A transition rule provides that taxpayers that used the federal M&IE rates or the special transportation industry rates during the first nine months of 2018 for an individual can’t switch to the other method for that individual until 2019. (Rev Proc 2011-47, Sec. 4.06(2))