The IRS has issued new guidance regarding how businesses, self-employed individuals, and qualified employees can use per diem rules to substantiate their business-travel expenses for tax purposes. The guidance in Revenue Procedure (RP) 2019-48 modifies 2011 guidance, reflecting changes made by the tax reform reconciliation act of 2017—commonly referred to as the Tax Cuts and Jobs Act (TCJA).
In short, the per diem rules themselves haven’t significantly changed. Instead, RP 2019-48 deletes guidance for taxpayers who, before the TCJA, were allowed to deduct certain unreimbursed business travel expenses.
Here’s a refresher of what changed under the TCJA and rules for using per diem rates.
The TCJA and Business Expenses
The TCJA amended the tax code to generally disallow a business’s deductions for expenses related to entertainment, amusement, or recreation incurred or paid after December 31, 2017. A business may still claim deductions for employees’ reimbursed business travel expenses for lodging, meals, and certain incidentals. However, food and beverage expenses related to business travel away from home remain subject to a 50% limit. Different rules and rates apply to the transportation industry.
The TCJA also suspended all miscellaneous itemized deductions subject to the 2% floor until 2026, including most deductions for employees’ unreimbursed business travel expenses. However, self-employed taxpayers and qualified employees—such as military reservists and certain state or local government officials, educators, and performing artists—can continue to deduct unreimbursed expenses for travel away from home.
The tax code requires that these expenses be substantiated, whether they’re claimed on a business’s or an individual’s tax return.
RP 2019-48 Guidance
RP 2019-48 provides rules for using a per diem rate to substantiate an employee’s lodging, meal, and incidental expenses—or meal and incidental expenses only—that a payer reimburses. A payer is defined as an employer, its agent, or a third party. Self-employed individuals and qualified employees may use the rules to substantiate their unreimbursed expenses for business travel.
The guidance makes clear that neither businesses nor individuals must use the methods described. They can instead substantiate actual allowable expenses if they maintain adequate records.
Per Diem Rules
When a business pays a per diem allowance for lodging, meal, and incidental expenses, the amount considered substantiated for each calendar day equals the lesser of either:
1) The per diem allowance
2) The amount computed at the federal per diem rate for the relevant location
Generally, the US General Services Administration’s per diem rate for federal workers who travel varies by location and time of year. Incidental expenses are limited to fees and tips given to porters, baggage carriers, bellhops, and hotel staff.
As long as the employee provides time, place, and business purpose substantiation—receipts aren’t required—the per diem is treated as made under an accountable plan. That means it isn’t reported as wages or other compensation, and it isn’t subject to employment tax withholding and payment.
Meal and Incidental Expenses
If the business pays a per diem allowance only for meal and incidental expenses (M&IE), the amount substantiated for each calendar day is the lesser of:
1) The allowance for that day
2) The amount computed at the federal M&IE rate for the location for that day or partial day
A per diem allowance is only treated as paid for M&IE if any of the following are true:
- The business pays the employee for actual expenses for lodging based on receipts
- The business provides the lodging
- The business pays the actual lodging expenses directly to the lodging provider
- The business doesn’t have a reasonable belief that the employee will or did incur lodging expenses
- The allowance is computed on a basis similar to that used to compute an employee’s compensation—for example, hours worked or miles traveled
Employees again must substantiate the time, place, and business purpose of the travel.
Self-Employment and Qualified Employees
Self-employed individuals and qualified employees can substantiate their deductions for M&IE by using an amount computed at the federal rate for the location for each calendar day or partial day of travel. The individual or employee also must document the time, place, and business purpose.
If these individuals have incidental expenses but no meal expenses for a calendar day or partial day, they can use the $5 per day incidental-expense-only rate. It will also be considered substantiated with documentation of the time, place, and business purpose of the travel.
High-Low Substantiation Method
Businesses that pay per diem can use the high-low method to substantiate lodging, meal and incidental expenses, or M&IE only. Employees and self-employed individuals, however, aren’t permitted to use this method instead of the M&IE deduction method described above.
Application
Under the high-low method, a uniform high rate applies to all designated high-cost locations, and a low rate applies to every other location in the continental United States. The appropriate rate applies as if it were the federal per diem rate for the location, so the expenses substantiated for each calendar day equal the lesser of the actual per diem allowance for that day or the applicable high-low rate.
Current High-Low Rates
As of October 1, 2019, the federal per diem rates for high-low purposes are:
- $297 for travel to any high-cost location, including $71 for M&IE
- $200 for travel to any other location in the continental United States, including $60 for M&IE
- $5 per day for incidental expenses only
Businesses that use the high-low substantiation method for an employee must apply the method for all amounts paid to that employee for travel away from home within the continental United States during the calendar year. They can use any permissible method of reimbursement.
The IRS publishes an annual Notice that lists the high-cost locations for 2019-2020 and includes some changes from the previous year’s list. IRS Notice 2019-55 contains this information, listing the high-cost locations for 2019–2020, and it includes some changes from the previous year’s list. Transition rules apply in the final three months of a calendar year.
Effective Dates
The guidance is currently effective for per diem allowances for lodging, meal, and incidental expenses—or M&IE only—that are paid to an employee on or after November 26, 2019, for travel on or after that date. /p>
For purposes of self-employed individuals and qualified employees who travel, it’s effective for meal and incidental expenses—or incidental expenses only—paid or incurred on or after the same date.
We’re Here to Help
To learn more about RP 2019-48 or how these changes may impact you or your business, contact your Moss Adams professional.