Alternative Substantiation Methods
Fortunately, the IRS offers simpler alternatives that may be worthwhile for some companies. Instead of reimbursing employees for their actual expenses for lodging, meals and incidentals while traveling, employers may pay them a per diem amount, based on IRS-approved rates that vary from locality to locality.
If your company uses per diem rates, employees don't have to meet the usual recordkeeping rules required by law. Receipts of expenses generally aren't required under the per diem method. Instead, the employer simply pays the specified allowance to employees, although they still must substantiate the time, place and business purpose of the travel. Per diem reimbursements generally aren't subject to income or payroll tax withholding or reported on the employee's Form W-2.
Important note: Per diem rates can't be paid to individuals who own 10% or more of the business.
Under the "high-low method," the IRS establishes an annual flat rate for certain areas with higher costs of living. All the locations within the continental United States that aren't listed as "high-cost" automatically fall into the low-cost category. The high-low method may be used in lieu of the specific per diem rates for business destinations. Examples of high-cost areas include San Francisco, Boston and Washington, D.C. (See the chart below for a complete list by state.)
Under some circumstances — for example, if an employer provides lodging or pays the hotel directly — employees may receive a per diem reimbursement only for their meals and incidental expenses. The IRS also provides a $5 incidental-expenses-only rate for employees who don't pay or incur meal expenses for a calendar day (or partial day) of travel.
Recent Updates for 2016
The IRS recently updated the per diem rates for business travel for fiscal year 2016, which starts on October 1, 2015. Under the high-low method, the per diem rate for all high-cost areas within the continental United States is $275 for post-September 30, 2015, travel (consisting of $207 for lodging and $68 for meals and incidental expenses). For all other areas within the continental United States, the per diem rate is $185 for post-September 30, 2015, travel (consisting of $128 for lodging and $57 for meals and incidental expenses). Compared to the prior simplified per diems, the high-cost area per diem has increased $16, and the low-cost area per diem has increased $13.
The following costs aren't included in incidental expenses:
- Transportation costs between places of lodging or business and places where meals are taken, and
- Mailing costs of filing travel vouchers and paying employer-sponsored charge card billings.
The IRS also modified the list of high-cost areas for post-September 30 travel. The following localities have been added to the high-cost list:
- Mammoth Lakes, Calif.,
- Grand Lake, Colo.,
- Silverthorne/Breckenridge, Colo.,
- Traverse City/Leland, Mich.,
- Hershey, Pa., and
- Wallops Island, Va.
- Sedona, Ariz.,
- Santa Cruz, Calif.,
- New Orleans, La.,
- Baltimore City, Md.,
- Cambridge/St. Michaels, Md.,
- Glendive/Sidney, Mont.,
- Conway, N.H.,
- Glens Falls, N.Y.,
- Tarrytown/White Plains/New Rochelle, N.Y.,
- Kill Devil, N.C., and
- Williston, N.C.
- Napa, Calif.,
- Telluride, Colo.,
- Miami, Fla.,
- Martha's Vineyard, Mass.,
- Nantucket, Mass.,
- Jamestown/Middletown/Newport, R.I.,
- Charleston, S.C., and
- Jackson/Pinedale, Wyo.
Companies that use the high-low method for an employee must continue to use it for all reimbursement of business travel expenses within the continental United States during the calendar year. The company may use any permissible method to reimburse that employee for any travel outside the continental United States, however.
For travel in the last three months of a calendar year, employers must continue to use the same method (per diem method or high-low method) for an employee as they used during the first nine months of the calendar year. Also, employers may use either:
1. The rates and high-cost localities in effect for the first nine months of the calendar year or
2. The updated rates and high-cost localities in effect for the last three months of the calendar year, as long as they use the same rates and localities consistently for all employees reimbursed under the high-low method.
In terms of deducting amounts reimbursed to employees on the company's tax return, employers must treat meals and incidental expenses as a food and beverage expense that's subject to the 50% deduction limit on meal expenses. For certain types of employees — such as air transport workers, interstate truckers and bus drivers — the percentage is 80% for food and beverage expenses related to a period of duty subject to the hours-of-service limits of the U.S. Department of Transportation.
Example: A company reimburses its marketing manager for attending a July trade show in Chicago based on the $275 high-cost per diem. It may deduct $241 ($207 for lodging plus $34 for half of the meals and incidental expense allowance).
Contact a Tax Pro
IRS auditors often target business travel expenses. So, detailed recordkeeping is imperative. Per diem substantiation methods may simplify your recordkeeping requirements and minimize IRS scrutiny. Contact your tax adviser to determine if it makes sense for your company to use per diem rates to reimburse employees' business travel expenses.
|California||Mammoth Lakes (December 1-February 29)|
|Monterey (July 1-August 31)|
|Napa (October 1-October 31; May 1-September 30)|
|San Mateo/Foster City/Belmont|
|Sunnyvale/Palo Alto/San Jose|
|Colorado||Aspen (December 1-March 31; June 1-August 31)|
|Grand Lake (December 1-March 31)|
|Silverthorne/Breckenridge (December 1-March 31)|
|Steamboat Springs (December 1-March 31)|
|Telluride (December 1-March 31; June 1-August 31)|
|Vail (December 1-March 31; July 1-August 31)|
|District of Columbia||Washington, D.C.|
|Florida||Boca Raton/Delray Beach/Jupiter (January 1-April 30)|
|Fort Lauderdale (January 1-March 31)|
|Fort Walton Beach/DeFuniak Springs (June 1-July 31)|
|Miami (December 1-March 31)|
|Naples (January 1-April 30)|
|Illinois||Chicago (October 1-November 30; March 1-September 30)|
|Maine||Bar Harbor (July 1-August 31)|
|Maryland||Ocean City (June 1-August 31)|
|Falmouth (July 1-August 31)|
|Martha's Vineyard (June 1-September 30)|
|Nantucket (October 1-December 31; June 1-September 30)|
|Michigan||Traverse City/Leland (July 1-August 31)|
|New York||Lake Placid (July 1-August 31)|
|New York City|
|Saratoga Springs/Schenectady (July 1-August 31)|
|Pennsylvania||Hershey (June 1-August 31)|
|Philadelphia (October 1-November 30; March 1-June 30; September 1-September 30)|
|Rhode Island||Jamestown/Middletown/Newport (June 1-August 31)|
|South Carolina||Charleston (October1-November 30; March 1-September 30)|
|Utah||Park City (December 1-March 31)|
|Virginia||Virginia Beach (June 1-August 31)|
|Wallops Island (July 1-August 31)|
|Wyoming||Jackson/Pinedale (June 1-September 30)|