The IRS recently updated the per diem rates for business travel for fiscal year 2015, which started on October 1, 2014 - see IRS Notice 2014-57. Under the high-low method, the per diem rate for all high-cost areas within the continental United States is $259 for post-September 30, 2014 travel (consisting of $194 for lodging and $65 for meals and incidental expenses). For all other areas within the continental United States, the per diem rate is $172 for post-September 30, 2014 travel (consisting of $120 for lodging and $52 for meals and incidental expenses). Compared to the prior simplified per diems, the high-cost area per diem has increased $8, and the low-cost area per diem has increased $2.
Another important change relates to incidental expenses. The following costs are no longer included in incidental expenses:
Accordingly, taxpayers using per diem rates may separately deduct, or be reimbursed for, transportation and mailing expenses.
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:
These areas have been removed from the previous list of high-cost localities:
Note: Certain tourist-attraction areas only count as high-cost areas on a seasonal basis. Starting on October 1, the following tourist-attraction areas have changed the portion of the year in which they are high-cost localities:
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:
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 percent deduction limit on meal expenses. For certain types of employees -- such as air transport workers, interstate truckers and bus drivers -- the percentage is 80 percent 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 $259 high-cost per diem. It may deduct $226.50 ($194 for lodging plus $32.50 for half of the meals and incidental expense allowance).
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 our tax pros to determine if it makes sense for your company to use per diem rates to reimburse employees' business travel expenses.
Dan Smogor, CPA, CGMA
Mike Varner, CPA, CGMA
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