IRS has issued a new notice carrying the "high-low" simplified per-diem rates for post-Sept. 30, 2017 travel. The high-cost area per-diem increases $2, and the low-cost area per-diem increases $2, from the prior simplified per-diems.
Observation: In the past, IRS supplied the changed per-diem rates in an annual update of a revenue procedure. In 2011, IRS began providing the changed rates in an annual notice and announced that it would no longer revise the revenue procedure annually, but only as needed. Taxpayers using the rates and list of high-cost localities provided in Notice 2017-54 must comply with Rev Proc 2011-47, 2011-42 IRB 520, the last updated revenue procedure on the subject.
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 General Services Administration (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, 2017, may be found at 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 2017 for CONUS expenses in all of 2017, instead of using the GSA rates that are effective Oct. 1, 2017, provided that the employer consistently uses those prior rates for the last three months of 2017. (Rev Proc 2011-47, Sec. 4.06; Notice 2015-63, Sec. 6; Notice 2016-58, Sec. 6; Notice 2017-54, Sec. 6)
Definition of incidental expenses. Rev Proc 2011-47, Sec. 3.02(3) provided that the term "incidental expenses" has the same meaning as in the Federal Travel Regulations, 41 C.F.R. 300-3.1, and that future changes to the definition of incidental expenses in the Federal Travel Regulations would be announced in the annual per-diem notice. On Oct. 22, 2012, the GSA published final regs revising the definition of incidental expenses under the Federal Travel Regulations to include only fees and tips given to porters, baggage carriers, hotel staff, and staff on ships. Transportation between places of lodging or business and places where meals are taken, and the mailing cost of filing travel vouchers and paying employer-sponsored charge card billings, are no longer included in incidental expenses. Accordingly, taxpayers using per-diem rates may separately deduct or be reimbursed for transportation and mailing expenses. (Notice 2017-54, Sec. 2)
High-low rates. A payor that pays a per-diem allowance in lieu of reimbursing actual expenses an employee pays or incurs or will pay or incur for travel away from home may use the high-low substantiation method in lieu of the per-diem substantiation method or the M&IE-only method. (Rev Proc 2011-47, Sec. 5.01)
Under the high-low substantiation method, 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, 2017 travel, the high-cost-area per diem is $284 (up from $282), consisting of $216 for lodging and $68 for M&IE. The per-diem for all other localities is $191 (up from $189), consisting of $134 for lodging and $57 for M&IE. (Notice 2016-58, Sec. 5; Notice 2017-54, Sec. 5)
Changes in high-low per diem localities. The following changes have been made to the list of high-cost localities:
- The following localities have been added to the list of high-cost localities: Oakland, California; Lewes, Delaware; Fort Myers, Florida; Hyannis, Massachusetts; Petoskey, Michigan; Portland, Oregon; Vancouver, Washington.
- The following localities have changed the portion of the year in which they are high-cost localities: Aspen, Colorado; Denver/Aurora, Colorado; Telluride, Colorado; Vail, Colorado; Bar Harbor, Maine; Ocean City, Maryland; Nantucket, Massachusetts; Philadelphia, Pennsylvania; Jamestown/Middletown/Newport, Rhode Island; Jackson/Pinedale, Wyoming.
- The following localities have been removed from the list of high-cost localities: Sedona, Arizona; Los Angeles, California; Vero Beach, Florida; Kill Devil, North Carolina.
Transition rules. For travel in the last three months of a calendar year:
- A payor must continue to use the same method (per-diem method, or high-low method) for an employee as the payor used during the first nine months of the calendar year; and
- A payor may use either the rates and high-cost localities in effect for the first nine months of the calendar year or the updated rates and high-cost localities in effect for the last three months of the calendar year if the payor uses the same rates and localities consistently for all employees reimbursed under the high-low method. (Rev Proc 2011-47, Sec. 5.04; Notice 2015-63, Sec. 6; Notice 2016-58, Sec. 6; Notice 2017-54, Sec. 6)
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 $250 ($216 for lodging plus $34 (half of $68 M&IE)). For non-high-cost areas, the payor deducts $162.50 ($134 for lodging, plus $28.50 (half of $57 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, 2017 travel, deduct $5 per day (same as previous rate) for each calendar day (or partial day) the taxpayer is away from home. (Notice 2017-54, Sec. 4) 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 2011-47, Sec. 4.05, Rev Proc 2011-47, Sec. 6.05(5))
M&IE-only per-diem. Under some circumstances, an employee may receive a per-diem reimbursement only for his M&IE 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 2011-47, Sec. 4.03)
Transportation industry per diem. Effective Oct. 1, 2017, taxpayers in the transportation industry paying (or deducting) a per-diem only for M&IE may treat $63 as the M&IE rate for all localities within CONUS and $68 as the M&IE rate for all localities outside of CONUS (same as previously). (Notice 2017-54, Sec. 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 2017 for an individual can't switch to the other method for that individual until 2018. (Rev Proc 2011-47, Sec. 4.06(2))
References: For high-low per-diem rules, see FTC 2d/FIN ¶ L-4718; United States Tax Reporter ¶ 2744.18.