Recordkeeping for reimbursing business travel expenses can be cumbersome. Instead of reimbursing employees for the actual costs they incur for out-of-town lodging, meals and incidentals, some employers opt to pay fixed travel per diems. These amounts are based on IRS-approved rates that vary by locality. Here's what you'll need to know to determine if this simplified approach is right for your business.
Under the "high-low method," the IRS establishes an annual flat rate for certain areas with higher costs of living. All 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 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. There's also 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.
The following items aren't considered incidental expenses:
You should consider reimbursing employees separately for these expenses, and then deducting the amounts as ordinary business expenses.
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, your organization simply pays the specified allowance to employees.
But employees 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. It's also important to note that per diem rates can't be paid to individuals who own 10% or more of the business.
The IRS recently updated the per diem rates for business travel for fiscal year 2023, which started on October 1, 2022. Under the high-low method, the per diem rate for all high-cost areas within the continental United States is $297 for post-September 30, 2022, travel ($223 for lodging and $74 for meals and incidental expenses). For all other areas within the continental United States, the per diem rate is $204 for post-September 30, 2022, travel ($140 for lodging and $64 for meals and incidental expenses). Compared to the prior simplified per diems, both the high-cost area per diem has increased $1, and the low-cost area per diem has increased $2.
The IRS also modified the list of high-cost areas for post-September 30 travel. The following locations have been added to the high-cost list:
Crested Butte/Gunnison, Colo., has been removed from the previous list of high-cost localities. In addition, certain tourist-attraction areas only count as high-cost areas on a seasonal basis. Starting on October 1, the portion of the year in which the following locations are high-cost localities has changed:
Important: This method is subject to various rules and restrictions. For example, if you use the high-low method for an employee, you must continue to use it for all reimbursement of business travel expenses within the continental United States during the calendar year. Your company may use any permissible method to reimburse that employee for any travel outside the continental United States, however.
For travel during the last three months of a calendar year, you must continue to use the same method (per diem or high-low) for an employee as you used during the first nine months of the calendar year. Also, your organization may use either:
In terms of deducting amounts reimbursed to employees on their company's tax return, employers normally 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.
Important: Under the Consolidated Appropriations Act (CAA), for 2021 and 2022 only, business meals provided by restaurants are 100% deductible. Starting on January 1, 2023, the previous limits on deducting business meals while traveling are scheduled to resume.
Don't let expense reimbursements for business travel become a source of frustration for you or your employees. Contact your tax advisor for ideas to simplify the reimbursement process that will pass IRS scrutiny, while eliminating administrative red tape.
For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) suspended miscellaneous itemized deductions for individual taxpayers. These deductions include such items as tax preparation costs, investment expenses, union dues and unreimbursed employee business expenses. Under prior law, taxpayers could deduct miscellaneous itemized deductions on their personal tax returns to the extent that the total exceeded 2% of adjusted gross income.
So, unless your business has formal expense reimbursement policies and procedures in place, your employees won't be able to deduct any business-related travel expenses on their personal returns. Instead, for 2018 through 2025, they'll be forced to pay out-of-pocket for unreimbursed out-of-town lodging, meals and incidental expenses. If your company doesn't have a formal expense reimbursement plan, it could be at a disadvantage when trying to attract and retain employees who travel regularly.
On the other hand, employer-reimbursed travel expenses aren't taxable to the employee. And your organization can deduct reimbursed travel expenses as an ordinary business expense.
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