While some business expenses are fixed, businesses whose employees have to travel away from home incur additional expenses for hotel rooms, meals, and more. In most cases, these employees are not expected to pay these expenses out of their own pockets. Rather, the businesses reimburse them for what they spend.
To help address tax issues surrounding these expenses, the government announces the amount it considers appropriate for employees to be reimbursed (and for the businesses to write off as an allowable business expense) for daily — or per diem — expenses. This number is effective on October 1st of each year and is normally announced around that date, but this year the Internal Revenue Service (IRS) has provided the information early.
Per diem is a Latin phrase that translates into “for each day,” and in tax terms it refers to the amount that U.S. employers are able to provide their employees for the costs of their meals, lodging, and other small expenses when they travel for business. A per diem is different from actual expenses: it may be less for some costs and for others it may be more.
The expenses encompassed under M&IE, or Special Meals and Incidental Expenses, include all meals, laundry or dry cleaning, room service, ironing of clothing, and tips or fees paid to those who provide services worthy of financial recognition, including bag handlers, waiters, and others.
The IRS has indicated that there will be no change to the per diem rates allowed for 2020: for meals and fees it will remain $66 for those traveling within the continental United States and $71 for travel outside of the continental United States. The per diem rate for tips for porters and hotel staff will remain $5 per day, whether the travel takes the employee in or out of the continental U.S.
Travel costs between lodging, the work location, and dining locations, as well as any costs associated with using the employee’s own credit card or filling out and filing travel vouchers, continue to be a notable exception to what is included in allowable per diem incidental expenses. This can leave employees who are compensated under the per diem scheme either paying for their own costs or asking their employer to refund them what they have spent.
In the past, employees were able to deduct these and other unreimbursed job expenses, but as of the passing of the Tax Cuts and Jobs Act (TCJA), unreimbursed job expenses – including those for travel, mileage, and other miscellaneous expenses can no longer be itemized unless they exceed 2 percent of the employee’s income. This will hold true for tax years from 2018 through 2025, leaving even the use of the standard business mileage rate (found here) something that most employees will not be able to take advantage of as a deductible, with the notable exception of those who serve as local or state officials paid on a fee basis, members of a reserve component of the Armed Forces of the United States, or certain performing artists. These individuals should check Notice 2018-42 (downloads as a PDF) to see whether they qualify as one of those who are still able to take unreimbursed employee travel expenses as a deduction to income on their income tax form.
In many situations, the established per diem rate falls far short of actual expenses, and this is particularly true if business takes an employee to a destination that commands notably high fees. In recognition of the costliness of certain markets, the IRS has created a high-low substantiation method and identified what they term high-cost localities that command higher per diem rates. High-cost locality per diems are established at $292 for travel, while other localities within the continental United States command a per diem of $198. There is no shift in meal and incidental expenses.
Of course, since the cost of travel can vary depending on where - and when - you're going, there are special rates for certain destinations. For purposes of the high-low substantiation method, the per diem rates are $292 for travel to any high-cost locality and $198 for travel to any other locality within the continental United States. The meals & incidental expenses per diem for those destinations remain $71 for travel to a high-cost locality and $60 for travel to any other locality within the continental United States.
The list of high-cost localities is fluid based on market demand and the rates that an area commands, and for this year the IRS announced the following changes:
Per diem monies are given to the employee but are not considered a part of the employee’s taxable income as long as the amount that is given is in keeping with or less than the published federal rate listed above and the employee submits an expense report to confirm the expenses incurred. Per diem amounts paid that are greater than the published federal per diem rate will be considered part of the employee’s taxable income. The per diem amount can be provided for meal costs alone or for a combination of meals and lodging as appropriate.
As a self-employed worker who incurs business-related expenses, you are able to deduct expenses using Schedule C when submitting your income tax. The published per diem rates only apply to the costs of meals, adding one more reason that entrepreneurs need to maintain meticulous records when preparing their expense reports.
Notice 2020-71 (downloads as a PDF) contains a wealth of information regarding per diem rates and qualifications.
Visit the General Services Administration (GSA) website for a complete listing of per diem rates by locality or zip code.
About Frank Jenkins Jr
Frank Jenkins Jr. CPA is the managing partner of Adams, Jenkins & Cheatham, a CPA practice based in Midlothian, VA. Frank specializes in Consulting services, tax planning, audit & assurances. "I genuinely care about our clients because I have a personal connection with them." He is active in the community and belongs to the AICPA and the VSCPA.
