Simplified Per-Diem Rates Lowered For Post-Sept. 30 Business Travel

Rev Proc 2010-39, 2010-42 IRB

IRS has issued a new revenue procedure carrying the "high-low" simplified per-diem rates for post-Sept. 30, 2010 travel. The high-cost area per-diem decreases $25, and the low-cost area per-diem decreases $3, 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 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, 2010, 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 2010 for CONUS expenses in all of 2010, instead of using the GSA rates that are effective Oct. 1, 2010, provided that the employer consistently uses those prior rates for the last three months of 2010. (Rev Proc 2010-39, Sec. 3.02(1)(a))

High-low rates. Instead of using actual per-diems, employers may use a simplified "high-low" per-diem, under which 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, 2010 travel, the high-cost-area per diem is $233 ($25 less than the previous rate), consisting of $168 for lodging and $65 for M&IE. The per-diem for all other localities is $160 ($3 less than the previous rate), consisting of $108 for lodging and $52 for M&IE. (Rev Proc 2010-39, Sec. 5.02)

Changes in high-low per diem localities. Effective Oct. 1, 2010, (1) Yosemite National Park, California; Silverthorne/Breckenridge, Colorado; New Orleans, Louisiana; Falmouth, Massachusetts; Riverhead/Ronkonkoma/Melville, New York; Kill Devil, North Carolina; Stowe, Vermont; and Virginia Beach, Virginia have been added to the list of high cost areas; (2) the dates when a number of seasonal-attraction localities qualify as high-cost have been changed; and (3) Hershey, Pennsylvania has been removed from the list of high-cost localities. (Rev Proc 2010-39, Sec. 5.04)

Transition rules. A payor using the actual per-diem method for an employee for the first nine months of 2010 can't use the high-low per-diem method for that employee until Jan. 1, 2011. A payor using the high-low method for an employee for the first nine months of 2010 (1) must continue using that method for the rest of 2010 for that employee, but (2) may consistently use the high-low rates (and the high-cost localities) carried in Rev Proc 2009-47, 2009-42 IRB 524, Sec. 5, for the rest of 2010 (instead of using the new high-low rates and the new list of high-cost localities). (Rev Proc 2010-39, Sec. 5.06) However, the payor may still reimburse the employee's actual expenses, use the M&IE-only per diem method (see below), or use the regular federal per-diem rate for travel outside CONUS. (Rev Proc 2010-39, Sec. 5.05(2))

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 2010-39, 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 $200.50 ($168 for lodging plus $32.50 (half of $65 M&IE)). For non-high-cost areas, the payor deducts $134 ($108 for lodging, plus $26 (half of $52 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, 2010 travel deduct $5 per day (same as previous rate) for each calendar day (or partial day) the taxpayer is away from home. 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 2010-39, Sec. 4.05, Rev Proc 2010-39, Sec. 6.05(5))

M&IE-only per-diem. Under some circumstances, an employee may receive a per-diem reimbursement only for his meals and incidental expenses 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 2010-39, Sec. 4.03)

Transportation industry per diem. Effective Oct. 1, 2010, taxpayers in the transportation industry paying (or deducting) a per-diem only for M&IE may treat $59 as the M&IE rate for all localities within CONUS and $65 as the M&IE rate for all localities outside of CONUS (same as the previous rates). (Rev Proc 2010-39, Sec. 4.04(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 2010 for an individual can't switch to the other method for that individual until 2011. (Rev Proc 2010-39, Sec. 4.04(6))

References: For high-low per diem rules, see FTC 2d/FIN ¶L-4718; United States Tax Reporter ¶2744.18; TaxDesk ¶296,020; TG ¶17824.