Wednesday, October 5, 2011

IRS Updates Rules on Using Per Diem Rates to Substantiate Expenses Incurred Away from Home (Rev. Proc. 2011-47)

The IRS has updated the rules for determining the amount of an employee’s ordinary and necessary business expenses for lodging, meals, and incidental expenses while traveling away from home that are deemed substantiated under Code Sec. 274(d) and Reg. §1.274-5. The guidance provides rules for using a per diem rate to substantiate lodging, meal and incidental expenses of an employee, or meal and incidental expenses only, that an employer reimburses.

If a per diem allowance is paid in lieu of reimbursement for actual lodging, meal and incidental expenses incurred by an employee for travel away from home, the amount of expenses deemed to be substantiated is the lesser of the per diem allowance for that day or the amount computed using the federal per diem rate for that locality, under §4.01. Similarly, if a per diem amount is paid for meal and incidental expenses only, the amount deemed substantiated is the lesser of the per diem allowance or the federal M&IE rate for that locality, per §4.02 and §4.03. Special rules are provided for the transportation industry in §4.04. The method for deducting incidental expenses only, without meal expenses, is provided in §4.05.

The IRS had announced its intention to discontinue the high-low substantiation method, but based on feedback received, it will continue authorization of that method. In addition, beginning with the rates for 2011-2012, the IRS will publish an annual notice containing the special per diem rates for purposes of the revenue procedure, and will update the revenue procedure only as needed, instead of annually. The high-low method may be used in lieu of the per diem method of §4.01 or the M&IE method of §4.02, with the lower of those per diem rates or the high-low rate under §5.02 being the amount deemed substantiated. The high and low rates, applicable to high-cost locations and other locations, respectively, apply as if they were federal per diem rates, and will be published in an annual notice. Under §5.03, if the high-low substantiation method is used to pay an employee, it must be used consistently for the entire year with respect to that employee.

Transition rules are set forth in §4.06 and §5.04. Special rules in §6 address the lack of necessity for a lodging receipt, situations where meals are provided in kind, proration of the relevant federal rate (regular per diem or M&IE), application of the appropriate limitation under Code Sec. 274(n), prohibition of double reimbursement or deduction, and situations where the employer and the employee are related parties. Application of the applicable rates is discussed in §7, and withholding and payment of employment taxes are covered in §8.

The revenue procedure is effective for per diem allowances for lodging, meal and incidental expenses, or M&IE expenses, that are paid to an employee on or after October 2, 2011, for travel away from home on or after that date. Rev. Proc. 2010-39, I.R.B. 2010-42, 459, is modified, amplified, and superseded.

Rev. Proc. 2011-47, 2011FED ¶46,494

Other References:

Code Sec. 162

CCH Reference – 2011FED ¶180.01

CCH Reference – 2011FED ¶1070.11

CCH Reference – 2011FED ¶8856.17

Code Sec. 274

CCH Reference – 2011FED ¶14,417.035

CCH Reference – 2011FED ¶14,417.037

CCH Reference – 2011FED ¶14,417.038

CCH Reference – 2011FED ¶14,417.039

CCH Reference – 2011FED ¶14,417.04

CCH Reference – 2011FED ¶14,417.041

CCH Reference – 2011FED ¶14,417.421

Tax Research Consultant

CCH Reference – TRC BUSEXP: 24,808

CCH Reference – TRC BUSEXP: 24,904

CCH Reference – TRC BUSEXP: 24,906.25

CCH Reference – TRC BUSEXP: 24,912.05

CCH Reference – TRC BUSEXP: 24,912.15

CCH Reference – TRC BUSEXP: 24,912.20

CCH Reference – TRC BUSEXP: 24,912.25

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