Simplified per-diem rates boosted for post-September 30 business travel
Rev Proc 2006-41, 2006-43 IRB
Many companies use per-diem rates to reimburse their employees for business travel expenses rather than requiring employees to submit receipts for their expenditure. The IRS recently increased the simplified per-diem rate (high-low per-diem rate) for post September 30 business travel expenses. Employers may begin using the new rates immediately or wait until January 1, 2007 to implement them.
Per-Diem Reimbursement Method:
Regular actual per-diem method:
An employer may pay a per-diem amount to an employee for business-travel expense reimbursement. If the rate paid doesn’t exceed IRS-approved maximums, and employee provides simplified substantiation (time, place and business purpose), the reimbursement is treated as made under an accountable plan, which is not subject to income or payroll tax withholding.
IRS-approved per-diem maximum is the GSA (General Services Administration) per-diem rate paid by the federal government to its workers on travel status. It usually contains two components: one for lodging expense and the other for meals and incidental expenses (M&IE) such as laundry and pressing of clothing, tips for services, mailing cost, etc. These rates effective October 1, 2006 for federal are available on the website at http://www.gsa.gov.
High-low per-diem method:
As an alternative, an employer may use a simplified high-low per-diem method, under which there is one uniform per-diem rate for all high-cost areas within CONUS (Continental U.S.) and another rate for all other areas within CONUS.
Compared to previous rate applying to travel on or after October 1, 2005, simplified high-low per-diem has been boosted for post September 30, 2006 business travel by $20 and $7 for high-cost areas and non-high-cost localities respectively. Specifically, the high-cost-area per-diem is $246, consisting of $188 for lodging and $58 for M&IE. That for all other localities is $148, consisting of $103 for lodging and $45 for M&IE.
High-Low Per-Diem Rate:
Rate effective October 1, 2006 Rate effective October 1, 2005
High-Cost Area Non-High-Cost Area High-Cost Area Non-High-Cost Area
Lodging rate ($) 188 103 168 96
M&IE rate ($) 58 45 58 45
Combined per-diem ($) 246 148 226 141
In the meantime, high-cost and non-high-cost localities are periodically updated by the IRS. This time, five localities – Santa Barbara, CA; South Lake Tahoe, CA; Fort Lauderdale, FL; Fort Walton Beach/DeFuniak Springs, FL; and Stuart, FL – are added to the list of high-cost areas, while a number are dropped from that list, such as Napa, CA; Bar Harbor, ME; and Conway, NH. Besides, modifications are made for the date of seasonal-attraction localities to qualify as high-cost area, and the definition of certain localities.
What’s more, transition rules are worth noticing here. On the one hand, a taxpayer using actual per-diem method for the first nine months of 2006 cannot use the high-low per-diem method until January 1, 2007. On the other hand, a taxpayer, using high-low per-diem method for the first nine months of 2006, must continue using such method. However, in terms of per-diem rate, he/she may have two choices: (i) he/she may immediately use new per-diem rate effective October 1, 2006, (ii) he/she may continue using old per-diem rate for the rest of 2006 and begin to use new rate from January 1, 2007.
Transition Rule for Per-Diem Application:
Per-Diem Method Per-Diem Rate
Choice I Choice II
Must use actual per-diem method for the rest of 2006
Immediately use GSA rates effective October 1, 2006
Use old per-diem rates for the rest of 2006, if those rates are used for the last three months of 2006
Must use high-low per-diem method for the rest of 2006
Immediately use new per-diem rates effective October 1, 2006
Use old per-diem rates for the rest of 2006
Other optional methods for per-diem:
(I) M&IE-only per-diem: Under the following circumstances, an employee may receive a per-diem reimbursement only for his/her M&IE during the business trip:
(i) An employer reimburses actual lodging costs;
(ii) An employer provides lodging in kind;
(iii) An employer pays the lodging directly;
(iv) An employer reasonably believes the worker will not incur lodging expenses (e.g., live in the house of relatives); or
(v) An employer bases his calculation on a method similar to that used for wages like hour worked, miles traveled.
If simplified substantiation is supplied, rate doesn’t exceed federal M&IE rate, and one of circumstances listed above happens, the MI&E paid is deemed as paid under an accountable plan.
(II) Incidental-expense-only deduction: For employees who don’t pay or incur meals expense for a calendar day (or partial day) in away-from-home travel, optional per-diem rate for “incidental expenses only” is set as $3 per day.
(III) Transportation industry per-diem: Taxpayers in the transportation industry paying a per-diem only for M&IE may have a special tax treatment. The IRS recognizes the unusual demands on employees and owners in transportation industry, and offers them some liberal deduction at tax time. Generally, a special $52 per-diem for M&IE applies for travel within the CONUS, while $58 per-diem for travel elsewhere.
Just now, “accountable plan” has been mentioned again and again. Sound familiar? It is an important factor for a taxpayer to properly account for employee business expenses on tax return, since not all employee business expenses are deductible for AGI (Adjusted Gross Income) as trade or business expenses.
In general, the IRS restricts the deduction for AGI to those situations in which employees are reimbursed for their expenses under an accountable plan, which requires employees make an adequate accounting of their expenses with their employer (e.g., keeping records invoice, paid bill, receipt, etc.) and return excess reimbursement to the employer. Regarding tax treatment, the distinction between accountable and nonaccountabe plan lies in two areas: (i) Are the reimbursed expenses included miscellaneous itemized deductions, subject to limitation of 2% of AGI? (ii) Who (employer or employee) is subject to 50% limitation on meals on the business travel? Specifically, employees who receive reimbursements from a nonaccountable plan may deduct their expenses only as miscellaneous itemized deductions. Besides, the deduction taken for meals costs is subject to the 50% limitation on meals before applying the overall 2% of AGI limitation.
Tax Treatment of Employee’s Meal Expense on Different Reimbursement Plan:
Employer’s tax deduction Employee’s tax deduction
Employer gets deduction for expense in corporate tax return, but the expense is subject to the 50% limitation on meals.
No 50% rule for meals applies. That is, all meals expense reimbursed is deductible, but such expenses should be includable in employee’s gross income.
Full of meals expense reimbursed to employee is deductible as reasonable business or trade expense.
Not only does 50% limitation on meals apply, but also all reimbursed meal expense is considered miscellaneous itemized deduction, subject to 2% of AGI limitation.
In this regard, in a high-cost area, the employer with an accountable plan takes a per-diem deduction of $217 ($188+$29), while the employer’s deduction for non-high-cost-area per-diem only amounts to $125.50 ($103+$22.5). However, no 50% limitation applies to the incidental-expense-only per-diem. With special per-diem rule applied to transportation industry, the employer may deduct 75% of the per-diem meals accordingly, and from 2008 on, the percentage will increase to 80%.
Self-employed individuals may not choose allowable federal per-diem rate above mentioned, however, both M&IE-only per-diem and incidental-expense-only per diem work for them.