Under current tax law, employees aren’t allowed to claim miscellaneous itemized deductions — including unreimbursed business expenses — on their personal tax returns for 2018 through 2025. So, it may be more important than ever for employers to set up expense reimbursement plans for business-related travel costs.
The recordkeeping for reimbursing actual expenses for lodging, meals and incidentals while traveling for business can be cumbersome. So, some employers instead opt to pay per diem amounts based on IRS-approved rates that vary from locality to locality. Here are some FAQs about this simplified process.
How Does This Approach Work?
Under the “high-low method,” the IRS establishes an annual flat rate for certain areas with higher costs of living. All the locations within the continental United States that aren’t listed as “high-cost” automatically fall into the low-cost category. The high-low method may be used in lieu of the specific per diem rates for business destinations. Examples of high-cost areas include San Francisco, Boston and Washington, D.C. (See the chart below for a complete list by state.)
Under some circumstances — for example, if an employer provides lodging or pays the hotel directly — employees may receive a per diem reimbursement only for their meals and incidental expenses. There’s also a $5 incidental-expenses-only rate for employees who don’t pay or incur meal expenses for a calendar day (or partial day) of travel.
Do Employees Need to Collect Receipts While Traveling?
If your company uses per diem rates, employees don’t have to meet the usual recordkeeping rules required by law. Receipts of expenses generally aren’t required under the per diem method. Instead, the employer simply pays the specified allowance to employees.
But employees still must substantiate the time, place and business purpose of the travel. Per diem reimbursements generally aren’t subject to income or payroll tax withholding or reported on the employee’s Form W-2. It’s also important to note that per diem rates can’t be paid to individuals who own 10% or more of the business.
What Are the Current Per Diem Rates?
The IRS recently updated the per diem rates for business travel for fiscal year 2019, which started on October 1, 2018. Under the high-low method, the per diem rate for all high-cost areas within the continental United States is $287 for post-September 30, 2018, travel (consisting of $216 for lodging and $71 for meals and incidental expenses). For all other areas within the continental United States, the per diem rate is $195 for post-September 30, 2018, travel (consisting of $135 for lodging and $60 for meals and incidental expenses). Compared to the prior simplified per diems, the high-cost area per diem has increased $3, and the low-cost area per diem has increased $4.
The IRS also modified the list of high-cost areas for post-September 30 travel. The following localities have been added to the high-cost list:
- Sedona, Ariz.,
- Los Angeles, Calif.,
- San Diego, Calif.,
- Vero Beach, Fla.,
- Jekyll Island/Brunswick, Ga.,
- Duluth, Minn.,
- Pecos, Texas,
- Moab, Utah, and
- Cody, Wyo.
On the other hand, these areas have been removed from the previous list of high-cost localities:
- Mill Valley/San Rafael/Novato, Calif.,
- Steamboat Springs, Colo.,
- Petoskey, Mich., and
- Saratoga Springs/Schenectady, N.Y.
Important note: Certain tourist-attraction areas only count as high-cost areas on a seasonal basis. Starting on October 1, the following tourist-attraction areas have changed the portion of the year in which they are high-cost localities:
- Oakland, Calif.,
- Aspen, Colo.,
- Boca Raton/Delray Beach/Jupiter, Fla.,
- Naples, Fla.,
- Bar Harbor/Rockport, Maine,
- Boston/Cambridge, Mass.,
- Jamestown/Middletown/Newport, R.I.,
- Charleston, S.C.,
- Vancouver, Wash., and
- Jackson/Pinedale, Wyo.
In addition, Traverse City, Mich., no longer includes Leland, Mich., and Bar Harbor, Maine, now includes Rockport, Maine.
Are There Any Special Rules and Restrictions?
Companies that use the high-low method for an employee must continue to use it for all reimbursement of business travel expenses within the continental United States during the calendar year. The company may use any permissible method to reimburse that employee for any travel outside the continental United States, however.
For travel in the last three months of a calendar year, employers must continue to use the same method (per diem method or high-low method) for an employee as they used during the first nine months of the calendar year. Also, employers may use either:
1. The rates and high-cost localities in effect for the first nine months of the calendar year or
2. The updated rates and high-cost localities in effect for the last three months of the calendar year, as long as they use the same rates and localities consistently for all employees reimbursed under the high-low method.
How Much Can Employers Deduct?
In terms of deducting amounts reimbursed to employees on the company’s tax return, employers must treat meals and incidental expenses as a food and beverage expense that’s subject to the 50% deduction limit on meal expenses. For certain types of employees — such as air transport workers, interstate truckers and bus drivers — the percentage is 80% for food and beverage expenses related to a period of duty subject to the hours-of-service limits of the U.S. Department of Transportation.
Example: A company reimburses its marketing manager for attending a June trade show in Philadelphia based on the $287 high-cost per diem. It may deduct $251.50 ($216 for lodging plus $35.50 for half of the meals and incidental expense allowance).
Got Additional Questions?
Contact us to discuss whether per diem substantiation methods could work for your business. We can help you implement travel expense reimbursement policies and procedures that will pass IRS scrutiny.
The High-Cost Area List for 2019
|California||Los Angeles (October 1-October 31; January 1-September 30)|
|Monterey (July 1-August 31)|
|Napa (October 1-October 31; May 1-September 30)|
|San Diego (January 1-July 31)|
|San Mateo/Foster City/Belmont|
|Sunnyvale/Palo Alto/San Jose|
|Colorado||Aspen (October 1-March 31; June 1-September 30)|
|Grand Lake (December 1-March 31)|
|Silverthorne/Breckenridge (December 1-March 31)|
|Vail (December 1-March 31; July 1-August 31)|
|Delaware||Lewes (July 1-August 31)|
|District of Columbia||Washington, D.C.|
|Florida||Boca Raton/Delray Beach/Jupiter (December 1-April 30)|
|Fort Lauderdale (January 1-April 30)|
|Fort Meyers (February 1-March 31)|
|Fort Walton Beach/DeFuniak Springs (June 1-July 31)|
|Miami (December 1-March 31)|
|Naples (February 1-April 30)|
|Vero Beach (December 1-April 30)|
|Georgia||Jekyll Island/Brunswick (March 1-July 31)|
|Illinois||Chicago (October 1-November 30; April 1-September 30)|
|Maine||Bar Harbor/Rockport (July 1-August 31)|
|Maryland||Ocean City (July 1-August 31)|
|Massachusetts||Boston/Cambridge (October 1-November 30; March 1-September 30)|
|Falmouth (July 1-August 31)|
|Hyannis (July 1-August 31)|
|Martha’s Vineyard (June 1-September 30)|
|Nantucket (June 1-September 30)|
|Michigan||Traverse City (July 1-August 31)|
|Minnesota||Duluth (June 1-August 31)|
|New York||Lake Placid (July 1-August 31)|
|New York City|
|Oregon||Portland (October 1-October 31, April 1-September 30)|
|Seaside (July 1-August 31)|
|Pennsylvania||Hershey (June 1-August 31)|
|Philadelphia (October 1-November 30; April 1- September 30)|
|Rhode Island||Jamestown/Middletown/Newport (June 1-August 31)|
|South Carolina||Charleston (October 1-October 31; March 1-September 30)|
|Texas||Pecos (January 1-March 31)|
|Utah||Moab (October 1-October 31; March 1-September 30)|
|Park City (December 1-March 31)|
|Virginia||Virginia Beach (June 1-August 31)|
|Wallops Island (July 1-August 31)|
|Vancouver (October 1-October 31; April 1-September 30)|
|Wyoming||Cody (June 1-September 30)|
|Jackson/Pinedale (June 1-August 31)|
– Source: IRS