A per diem allowance for meal and incidental expenses (M&IE) only may be used to substantiate an employee's or other payee's M&IEs for purposes of the employer's return (Rev. Proc. 2011-47). The amount that is deemed substantiated is equal to the lesser of the per diem allowance or the amount computed at the federal M"&IE rate for the locality of travel for the period that the employee is away from home. If M&IEs are substantiated using a per diem allowance, the entire amount is treated as a food and beverage expense subject to the 50-percent limitation on meal and entertainment expenses.
The M&IE rate must be prorated for partial days of travel away from home. If an employee's meals are provided by the employer, even though the employee may be working from home, the employee is entitled to deduct only the incidental expense portion of the applicable federal per deim M&IE rates (R.J. Zbylut, Dec. 57,348(M), 95 TCM 1172 (2008)).
Self-Employed Persons and Employees. Self-employed individuals and employees whose expenses are not reimbursed may also use the M&IE-only rate to substantiate M&IEs while traveling away from home. The taxpayer must actually prove through adequate records or sufficient corroborative evidence the time, place, and business purpose of the travel, and lodging costs.
Optional Method for Incidental-Expense-Only Deduction. Taxpayers may use an optional method to deduct only incidental expenses in lieu of using actual expenses. Taxpayers who do not incur any meal expenses may deduct $5 per calendar day (or partial day) as ordinary and necessary incidental expenses, paid or incurred, while traveling to any localities within the continental United States (CONUS) or outside the continental United States (OCONUS) (Notice 2017-54, Notice 2016-58). The optional method is subject to the proration rules for partial days and substantiation requirements for taxpayers who use the per diem method for substantiation (Rev. Proc. 2011-47). The optional method for incidental expenses only cannot also be used by taxpayers who use the lodging plus M&IE per diem method, the M&IE-only method, or the high-low method and the optional M&IE-only mnethod
Transportation Workers. The M&IE rates for travel awy from home on or after October 1, 2017, for both self-employed persons and employees in the transportation industry are $63 for CONUS localities and $68 for OCONUS localities. The M&IE rates for travel away from home on or after October 1, 2016, for both self-employed persons and employees in the transpotation industry are $63 for CONUS localities and $68 for OCONUS localities (Notice 2017-54, Notice 2016-58). An individual is in the transportation industry only if the individual's work: (1) directly involves moving people or goods by airplane, barge, bus, ship, train, or truck; and (2) regularly requires travel away from home that involves travel to localities with differing federal M&IE rates during a single trip.
Under a calendar-year convention for the transportation industry, taxpayers who used the federal M&IE rates during the first nine months of calendar year2017 to substantiate an individual's travel expenses may not use the special transportation industry rates for that individual until January 1, 2018 (Rev. Proc. 2011-47). Likewise, taxpayers who used the special transportation industry rates for the first nine months of calendar year 2017 to substantiate an individual's travel expenses may not use the federal M&IE rates for that individual until January 1, 2018.
Monday, March 19, 2018
Per Diem Allowances for Lodging Plus Meals and Incidental Expenses (M&IE)
Under the lodging plus meals and incidental expenses (M&IE) per diem method, the amount of an employee's (or other payor's_ reimbursed expenses that is deemed substantiated (for purposes of the employer's return) is equal to the lesser of the employee's per diem allowance or the federal per diem amount for the locality of travel for the period in which the employee is awy from home (Rev. Proc. 2011-47). The employer is not required to provide lodging receipts if per diem allowances are used to substantiate such expenses. The locality of travel is the place where the employee stops for sleep or rest. Employees and self-employed individuals may determine their allowable deductions for reimbursed M&IE while away from home by using the applicable federal M&IE rate. However, unreimbursed lodging costs must be substantiated by required records.
Per Diem Rates. The federal per diem rate for lodging plus M&IE depends upon the locality or travel. For various geographic areas within the continental United States (the 48 contiguous states plus the District of Columbia) (CONUS), the federal per diem rate for a given locality is equal to the sum of a maximum lodging amount and the M&IE rate for that locality. There are also federal per diem rates for nonforeign localities outside of the continental United States (OCONUS), such as Alaska, Hawaii, Puerto Rico, and U.S. possessions. Rates are also established for foreign travel (foreign OCONUS).
Rates for CONUS, OCONUS, and foreign travel are published under the Federal Travel Regulations for government travel and are updated periodically (Rev. Proc. 2011-47). The travel rates are issued to coincide with the government's fiscal year of October to September.
High-Low Method. Instead of using the maximum per diem rates from the CONUS table, taxpayers can compute per diem allowances for travel within the continental United States under the high-low method, which is a simplified method for determining a lodging plus M&IE per diem. This ethod divides all CONUS localities into two categories: low-cost or high-cost localitiesa (Rev. Proc. 2011-47).
For travel on or after October 1, 2017, through September 30, 2018, the following per diem rates for lodging expenses and M&IE are used for high-cost and low-cost localities (Noltice 2017-54):
High-cost locality -- Lodging Expense Rate = $216; M&IE Rate = $68; Maximum per diem rate = $284
Low-cost locality -- Lodging Expense Rate = $134; M&IE Rate = $57; Maximum per diem rate = $191
For travel on or after October 1, 2016, through September 30, 2017, the following per diem rates for lodging expenses and M&IE are used for high-cost and lkow-cost localities (Notice 2016-58):
High-cost locality -- Lodging Expense Rate = $214; M&IE Rate = $68; Maximum per diem rate = $282
Low-cost locality -- Lodging Expense Rate = $132; M&IE Rate = $57; Maximum per diem rate = $189
Some areas are treated as high-cost during certain periods of the year (e.g., peak tourist season) and as low-cost during other periods. Thus, employers who use the high-low method must determine whether the employee traveled in a high-cost area and if the area was classified as high-cost during the actual period of travel.
If the high-low method is used for an employee, then the payor may not use the actual federal maximum per diem rates for that employee during the calendar year for travel within CONUS. For travel outside CONUS, the employer may use the applicable federal OCONUS rates, the M&IE-only rate, or reimbursement of actual expoenses.
Proration of M&IE Allwance. If an individual is traveling away from home for only a portion of the day, these are two alternative methods that may be used to prorate the per diem rate or the M&IE rate. Under the first method, 75 percent of the M&"IE rate (or the M&IE portion of the per diem rate) is allowed for each partial day during which an employee or self-employed individual is traveling on business. Under the second method, referred to as the reasonable business practice method, the M&IE rate may be prorated using any method that is consistently applied and in accordance with reasonable business practice. For example, if an employee travels from 9:00 a.m. one day until 5:00 p.m. the next day, a proration method that gives an amount equal to two times the M&IE rate is treated in accordance with reasonable business practice (Rev. Proc. 2011-47).
Transition Rates. Taxpayers may continue to use the per diem rates effective prior to October 1, 2017, for the remainder of 2017, or they may begin to use the new per diem rates for reimbursement for travel, as long as they use either the pre-October 1 rates or the updated rates for the October 1 through December 31 period consistently. Taxpayers who used the per diem method or the high-low substantiation method to reimburse travel expenses during the first nine months of calendar year 2017 must continue to use that method for the remainder of the calendar-year 2017. Taxpayers who use the high-low method during the first nine months of calendar-year 2017 may either continue to use the rates and localities in effect before October 1, 2017, or use the updated rates and localities in effect for travel on and after October 1, 2017, as long as they use the same rates and locations consistently for all employees reimbursed under the high-low method.
Per Diem Rates. The federal per diem rate for lodging plus M&IE depends upon the locality or travel. For various geographic areas within the continental United States (the 48 contiguous states plus the District of Columbia) (CONUS), the federal per diem rate for a given locality is equal to the sum of a maximum lodging amount and the M&IE rate for that locality. There are also federal per diem rates for nonforeign localities outside of the continental United States (OCONUS), such as Alaska, Hawaii, Puerto Rico, and U.S. possessions. Rates are also established for foreign travel (foreign OCONUS).
Rates for CONUS, OCONUS, and foreign travel are published under the Federal Travel Regulations for government travel and are updated periodically (Rev. Proc. 2011-47). The travel rates are issued to coincide with the government's fiscal year of October to September.
High-Low Method. Instead of using the maximum per diem rates from the CONUS table, taxpayers can compute per diem allowances for travel within the continental United States under the high-low method, which is a simplified method for determining a lodging plus M&IE per diem. This ethod divides all CONUS localities into two categories: low-cost or high-cost localitiesa (Rev. Proc. 2011-47).
For travel on or after October 1, 2017, through September 30, 2018, the following per diem rates for lodging expenses and M&IE are used for high-cost and low-cost localities (Noltice 2017-54):
High-cost locality -- Lodging Expense Rate = $216; M&IE Rate = $68; Maximum per diem rate = $284
Low-cost locality -- Lodging Expense Rate = $134; M&IE Rate = $57; Maximum per diem rate = $191
For travel on or after October 1, 2016, through September 30, 2017, the following per diem rates for lodging expenses and M&IE are used for high-cost and lkow-cost localities (Notice 2016-58):
High-cost locality -- Lodging Expense Rate = $214; M&IE Rate = $68; Maximum per diem rate = $282
Low-cost locality -- Lodging Expense Rate = $132; M&IE Rate = $57; Maximum per diem rate = $189
Some areas are treated as high-cost during certain periods of the year (e.g., peak tourist season) and as low-cost during other periods. Thus, employers who use the high-low method must determine whether the employee traveled in a high-cost area and if the area was classified as high-cost during the actual period of travel.
If the high-low method is used for an employee, then the payor may not use the actual federal maximum per diem rates for that employee during the calendar year for travel within CONUS. For travel outside CONUS, the employer may use the applicable federal OCONUS rates, the M&IE-only rate, or reimbursement of actual expoenses.
Proration of M&IE Allwance. If an individual is traveling away from home for only a portion of the day, these are two alternative methods that may be used to prorate the per diem rate or the M&IE rate. Under the first method, 75 percent of the M&"IE rate (or the M&IE portion of the per diem rate) is allowed for each partial day during which an employee or self-employed individual is traveling on business. Under the second method, referred to as the reasonable business practice method, the M&IE rate may be prorated using any method that is consistently applied and in accordance with reasonable business practice. For example, if an employee travels from 9:00 a.m. one day until 5:00 p.m. the next day, a proration method that gives an amount equal to two times the M&IE rate is treated in accordance with reasonable business practice (Rev. Proc. 2011-47).
Transition Rates. Taxpayers may continue to use the per diem rates effective prior to October 1, 2017, for the remainder of 2017, or they may begin to use the new per diem rates for reimbursement for travel, as long as they use either the pre-October 1 rates or the updated rates for the October 1 through December 31 period consistently. Taxpayers who used the per diem method or the high-low substantiation method to reimburse travel expenses during the first nine months of calendar year 2017 must continue to use that method for the remainder of the calendar-year 2017. Taxpayers who use the high-low method during the first nine months of calendar-year 2017 may either continue to use the rates and localities in effect before October 1, 2017, or use the updated rates and localities in effect for travel on and after October 1, 2017, as long as they use the same rates and locations consistently for all employees reimbursed under the high-low method.
Per Diem Methods for Substantiating Meals and Lodging Expenses
A taxpayer must substantiate the amount, time, place, and business purpose of expenses paid or incurred in traveling away from home. Although the taxpayer has the option of keeping the actual records or travel expenses, the IRS has provided per diem allowances under which the amount of meals and incidental expenses (M&IE) may be deemed to be substantiated. The per diem allowances eliminate the need for substantiating actual costs (Rev. Proc. 2011-47). A taxpayer who uses per diem allowances to calculate the deductible amount must still substantiate the time, place, and business purpose of the travel by adequate records or other evidence.
Although most frequently used in the exployer-employee relationship, per diem allowances may be used in arrangements between any payor and payee, such as between independent contractors and those contracting with them. However, employees related to the payor under the related party rules of Code Sec. 267(b) (using a 10-percent common ownership standard) cannot use per diem substantiation methods.
Employees. The per diem method can be used to substantiate an employee's reimbursed expenses (for purposes of the employer's return) only if the reimbursement arrangement is an accountable plan and the allowance:
Expenses of laundry, lodging taxes, and telephone calls are not incidental expenses (IRS Pub. 463). Lodging taxes for travel within the continental United States and for nonforeign travel outside the continental United States are reimbursable miscellaneous expenses. However, lodging taxes have not been removed from the foreign per diem rates set by the U.S. State Department (41 C.F.R. 301-11.27).
Allowances Exceeding Federal Rates. If expenses are substantiated using a per diem amount, regardless of whether it covers lodging plus M&IE or only M&"IE, any reimbursement that exceeds the relevant federal per diem rates for that type of allowance must be included in the employee's (or independent contractor's) gross income. The excess portion is treated as paid under a nonaccountable plan, thus it must be reported on the employee's Form W-2 and is subject to withholding (Rev. § 1.62-2(h)(2)(i)(B)(1)).
Although most frequently used in the exployer-employee relationship, per diem allowances may be used in arrangements between any payor and payee, such as between independent contractors and those contracting with them. However, employees related to the payor under the related party rules of Code Sec. 267(b) (using a 10-percent common ownership standard) cannot use per diem substantiation methods.
Employees. The per diem method can be used to substantiate an employee's reimbursed expenses (for purposes of the employer's return) only if the reimbursement arrangement is an accountable plan and the allowance:
- is paid with respect to ordinary and necessary expenses incurred or that the employer reasonably expects to be incurred by an employee for lodging and/or M&IE while traveling away from home in connection with the performance of services as an employee;
- is reasonably calculated not to exceed the amount of the expense or the anticipated expenses; and
- is paid at the applicable federal per diem rate, a flat rate, or stated schedule.
- lodging plus M&IE, which provides a per diem allowance to cover lodging as well as meals and incidental expenses;
- M&IE only, which provides a per diem allowance for meals and incidental expenses only; and
- incidental expenses only, to be used when no meal or lodging expenses are incurred (Rev. Proc. 2011-47).
Expenses of laundry, lodging taxes, and telephone calls are not incidental expenses (IRS Pub. 463). Lodging taxes for travel within the continental United States and for nonforeign travel outside the continental United States are reimbursable miscellaneous expenses. However, lodging taxes have not been removed from the foreign per diem rates set by the U.S. State Department (41 C.F.R. 301-11.27).
Allowances Exceeding Federal Rates. If expenses are substantiated using a per diem amount, regardless of whether it covers lodging plus M&IE or only M&"IE, any reimbursement that exceeds the relevant federal per diem rates for that type of allowance must be included in the employee's (or independent contractor's) gross income. The excess portion is treated as paid under a nonaccountable plan, thus it must be reported on the employee's Form W-2 and is subject to withholding (Rev. § 1.62-2(h)(2)(i)(B)(1)).
Per Diem Allowances Subject to Withholding
If the amount of an employee's business expenses are substantiated through the use of an IRS-approved per diem allowance, any amounts paid by the employer to the employee exceeding the amounts deemed substantiated are treated as paid under a nonaccountable plan and subject to income tax withholding and other employment taxes (Reg. §§ 1.62-2(h)(2)(i)(B) and 31.3401(a)-4(b)(1)(ii)).
For per diem or mileage allowances paid in advance, withholding on any excess must occur no later than the first payroll period following the payroll period in which the expenses paid (i.e., the days or miles of travel) are substantiated by the employee. For a per diem or mileage allowance paid as a reimbursement, the excess amounts reimbursed are subject to withholding when paid.
For per diem or mileage allowances paid in advance, withholding on any excess must occur no later than the first payroll period following the payroll period in which the expenses paid (i.e., the days or miles of travel) are substantiated by the employee. For a per diem or mileage allowance paid as a reimbursement, the excess amounts reimbursed are subject to withholding when paid.
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