What Clients Should Know About Per Diem Rate Changes
In IRS Notice 2018-77, the agency explains the new special per diem rates taxpayers must use to substantiate “the amount of ordinary and necessary business expenses incurred while traveling away from home.”
The new rates are effective from Oct. 1, 2018 until Sept. 30, 2019.
This applies to special transportation industry meal and incidental expenses, the rate for the incidental-expenses-only deduction and the rates and list of high-cost locations for the purposes of the high-low substantiation method.
This is all done using a per diem tax rate to substantiate, under Internal Revenue Code 274(d) and Code 1.274-5 of the Income Tax Regulations, the amount of ordinary and necessary business expenses paid or incurred while traveling.
After Revenue Procedure 2011-47 was published, the General Services Administration issued final regulations that revised the definition of incidental expenses under the Federal Travel Regulations to include only fees and tips given to porters, baggage carriers, hotel employees and staff on ships.
Transportation between places of lodging or business and places where meals are taken, the mailing cost of filing travel vouchers and employer-sponsored charge card billings are no longer included under the category of incidental expenses.
That means taxpayers who use the per diem rates may separately deduct them, if allowed, or be reimbursed for transportation and mailing expenses.
The special transportation industry meal and incidental expenses (M&IE) rates for taxpayers in that field are $66 for any travel location in the continental U.S. (CONUS) and $71 for a location outside of OCONUS.
The rate for any CONUS or OCONUS travel location for the incidental-expenses-only deduction is $5 per day (see section 4.05 of Rev. Proc. 2011-47 or its successor).
Here’s a more detailed look into some of the regulations for 2018-2019.
Annual High-Low Rates
For the purposes of the high-low substantiation method, the per diem rates are $287 for travel to any high-cost locality and $195 for travel to any other area within the continental U.S.
In terms of paid-for meals for the purposes of Internal Revenue Code 274(n), the rates are $71 for travel to any high-cost locality and $60 for any other area within the continental U.S. (see section 5.02 of Rev. Proc. 2011-47 or its successor). These numbers are the same for the per diem rates in lieu of those described in Notice 2017-54 (the meal and incidental-expenses-only substantiation method).
The IRS has released a list of localities that have a federal per diem rate of $241 or more and are considered high cost for all of the calendar year or a portion. Note many of these locations and their respective visitation dates are in nice areas of the country that will be known for pleasant weather at these times or will have enjoyable activities available.
Furthermore, several new locations have been added to this list, including Sedona, AZ; Los Angeles, CA; Vero Beach, FL; Moab, UT; and Cody, WY. Some, such as Oakland, CA, and Newport, RI, remain on the list, but the portion of the year during which they are considered high cost has changed. Still others, such as San Rafael, CA, and Saratoga Springs, NY, have been removed entirely.
The following localities have been redefined: Traverse City, MI, no longer includes Leland, while Bar Harbor, ME, now includes Rockport.
For the purposes of computing the amount allowable as a travel deduction, this notice is effective for per diem allowances for lodging, meal and incidental expenses or for meal and incidental expenses only that are paid to any employee on or after Oct. 1 for travel away from home on or after this date. See sections 4.06 and 5.04 of Rev. Proc. 2011-47 (or its successor) for the transition rules for the last three months of calendar year 2018.
Finally, be aware section 7 of Notice 2017-54 is superseded.
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Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.