The IRS recently announced per diem rates that can be used to substantiate the amount of business expenses incurred for travel away from home on or after October 1, 2020. Employers using these rates to set per diem allowances can treat the amount of certain categories of travel expenses as substantiated without requiring that employees prove the actual amount spent. However, employees must still substantiate the time, place and business purposes of their travel expenses.
The amount deemed substantiated will be the lesser of the allowance actually paid or the applicable per diem rate for the same set of expenses. The IRS notice includes:
- Rates for use under the optional high-low substantiation method
- Special rates for transportation industry employers
- The rate for taxpayers taking a deduction only for incidental expenses.
Updated general guidance issued in 2019 regarding the use of per diems under the Tax Cuts and Jobs Act (TCJA) remains in effect.
For travel within the continental United States, the optional high-low method designates one per diem rate for high-cost locations and another for other locations. Employers can use the high-low method for substantiating lodging, meals and incidental expenses, or for substantiating meal and incidental expenses (M&IE) only.
Effective October 1, 2020, the high-low per diem rate that can be used for lodging, meals and incidental expenses decreased to $292 (from $297) for travel to high-cost locations and decreased to $198 (from $200) for travel to other locations. The high-low M&IE rates are unchanged at $71 for travel to high-cost locations and $60 for travel to other locations. Five locations have been added to the list of high-cost locations, two have been removed and 10 that remain on the list are now considered high-cost for a different portion of the calendar year.
Although self-employed individuals cannot use the high-low method, they can use other per diem rates to calculate the amount of their business expense deduction for business meals and incidental expenses or for incidental expenses alone. However, they still cannot use per diem rates for lodging. Furthermore, employees can no longer deduct their unreimbursed expenses because of the suspension of miscellaneous itemized deductions by the TCJA,. As a result, these other rates are effectively unavailable to them. The special rate for the incidental expenses deduction is unchanged at $5 per day for those who do not pay or incur meal expenses for a calendar or partial day of travel.
A simpler process
The per diem rules can greatly simplify the process of substantiating business travel expense amounts. If the amount of an allowance is deemed substantiated because it doesn’t exceed the applicable limit, any unspent amounts don’t have to be taxed or returned. If an employer pays per diem allowances that exceed what’s deemed substantiated, however, the employer must either treat the excess as taxable wages or require actual substantiation. When substantiation is required, any unsubstantiated portion of the allowance must be returned or treated as taxable wages.
If you have any questions about business travel expenses, please leave a comment below, or feel free to contact me directly, I’m happy to help.