On Sept. 25, 2017, the IRS released special per diem rates for travel away from home expenses incurred on or after Oct. 1, 2017. Per diem rates are essentially fixed amounts paid to employees to compensate for expenses incurred while traveling instead of itemizing actual expenses. If employers use these rates to set per diem allowances, they can treat the amount of certain categories of travel expenses as substantiated without making employees prove the actual amounts they’ve spent. However, for the amount to be considered substantiated, it has to be the lowest of the allowance actually paid or the per diem rate for the same type of expenses.
Specifically, this notice provides rates under the optional high-low substantiation method, special rates for employers in the transportation industry, and the rate for taking a deduction only for incidental expenses.
First, the optional high-low method defines one per diem rate for all high-cost locations (e.g., New York, Boston, San Francisco, Oakland, D.C., etc.) and another rate for all other locations in the continental U.S. Employers may use the defined high-low rates for either lodging, meals and incidentals, or for meals and incidental expenses only (M&IE). As of Oct. 1, 2017, the high-low per diem rates that can be used for lodging, meals and incidentals will increase to $284 for travel to high-cost areas and $191 for travel to all other areas. Interestingly, seven locations have been added to the high-cost area list, four have been removed and several others are now only considered high-cost for a certain part of the year (e.g., Aspen, Denver, Telluride, Nantucket, etc.).
Second, employers in the transportation industry have special M&IE rates for travel inside and outside the continental U.S. Those M&IE rates remain the same at $63 for travel expenses incurred within the continental U.S. and $68 for travel locations outside the continental U.S.
Lastly, the per diem rate for incidental expenses only is set at $5. These include fees and tips paid at lodging, which includes porters and hotel staff. This per diem rate may be used on or after Oct. 1, 2017.
If an employer offers a more generous allowance that exceeds the defined per diem rates, then the employer must require proof of the employee’s travel expenses, and then require return of any excess or treat the excess as taxable income. Otherwise, the entire allowance could become taxable to the employee. Therefore, employers should work with their tax advisor or legal counsel to ensure compliance with these rules.
IRS Notice 2017-54 »