The IRS has announced the special per diem rates that can be used to substantiate the amount of business expenses incurred for travel away from home on or after October 1, 2022. Employers using these rates to set per diem allowances can treat certain categories of travel expenses as substantiated without requiring that employees prove the actual amount they spent. (Employees must still substantiate the time, place, and business purpose of their travel expenses.) The amount deemed substantiated will be the lesser of the allowance actually paid or the applicable per diem rate for the same set of expenses. This notice, which replaces IRS Notice 2021-52 (see our Checkpoint article), announces rates for use under the optional high-low substantiation method, special rates for transportation industry employers, and the rate for taxpayers taking a deduction only for incidental expenses. General guidance issued in 2019 regarding the use of per diems after the Tax Cuts and Jobs Act remains in effect (see our Checkpoint article).
For travel within the continental United States, the optional high-low method designates one per diem rate for all high-cost locations and another for all other locations. Employers can use the high-low method for substantiating lodging, meals, and incidental expenses, or for substantiating meal and incidental expenses only (M&IE). Beginning October 1, 2022, the high-low per diem rate that can be used for lodging, meals, and incidental expenses increases to $297 (from $296) for travel to high-cost locations and increases to $204 (from $202) for travel to other locations. The high-low M&IE rates remain at $74 for travel to high-cost locations and $64 for travel to other locations. Many locations have been added to the list of high-cost locations, one has been removed, and many that remain on the list are now considered high-cost for a different portion of the calendar year.
While self-employed persons cannot use the high-low method, they may use other per diem rates to compute the amount of their business expense deduction for business meals and incidental expenses (but not lodging), or for incidental expenses alone. (Employees can no longer deduct their unreimbursed expenses due to the suspension of miscellaneous itemized deductions by the Tax Cuts and Jobs Act, so these other rates are effectively unavailable to them.) The special rate for the incidental expenses deduction is unchanged at $5 per day.
EBIA Comment: The per diem rules can greatly simplify the process of substantiating business travel expense amounts. If the amount of an allowance is deemed substantiated because it does not exceed the applicable limit, any unspent amounts do not have to be taxed or returned. If an employer pays per diem allowances that exceed what is deemed substantiated, however, the employer must either treat the excess as taxable wages or require actual substantiation. If substantiation is required, any unsubstantiated portion of the allowance must be returned or treated as taxable wages. For more information, see EBIA’s Fringe Benefits manual at Section XXI.G (“Travel Expense Reimbursements: Substantiation”).
Contributing Editors: EBIA Staff.