Reimbursing and substantiating business travel expenses can be a cumbersome, time-consuming process. Here’s how it traditionally works. Employees collect receipts as they travel and maintain records that note the time, place and business purpose of each expenditure. Then, they submit monthly expense reports that must be approved by their supervisors. Sometimes, there are administrative delays, if documentation is incomplete or a supervisor questions the business purpose (or reasonableness) of an expense item. Employers must hold on to all this documentation for several years in case the IRS inquires about business travel deductions.
Alternate 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.
Note: Per diem rates can’t be paid to individuals who own 10 percent or more of the business.
Under the “high-low method,” the IRS establishes an annual flat rate for certain high-cost 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 chart below for a complete list by state).
Under some circumstances — for example, if an employer provides lodging or pays the hotel directly — an employee may receive a per diem reimbursement only for his or her meals and incidental expenses for travel away from home. 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 away from home.
Recent Updates for 2015
The IRS recently updated the per diem rates for business travel for fiscal year 2015, which starts on October 1, 2014. 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:
- 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.
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:
- San Mateo/Foster City/Belmont, California;
- Sunnyvale/Palo Alto/San Jose, California;
- Glendive/Sidney, Montana.; and
- Williston, North Dakota.
On the other hand, these areas have been removed from the previous list of high-cost localities:
- Yosemite National Park, California;
- San Diego; and
- Floral Park/Garden City/Great Neck, New York.
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:
- Sedona, Arizona;
- Napa, California;
- Vail, Colorado;
- Fort Lauderdale, Florida;
- Miami; and
Rules and Restrictions
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 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).
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.
The High-Cost Area List for 2015
|Arizona||Sedona (March 1-May 31)|
|California||Monterey (July 1-August 31)|
|Napa (October 1-November 30; February 1-September 30)|
|San Mateo/Foster City/Belmont|
|Santa Cruz (June 1-August 31)|
|Sunnyvale/Palo Alto/San Jose|
|Colorado||Aspen (December 1-March 31; June 1-August 31)|
|Steamboat Springs (December 1-March 31)|
|Telluride (December 1-March 31; June 1-September 30)|
|Vail (December 1-March 31, July 1-August 31)|
|District of Columbia||Washington, D.C.|
|Florida||Boca Raton/Delray Beach/Jupiter (Jan. 1-April 30)|
|Fort Lauderdale (Jan. 1-March 31)|
|Fort Walton Beach/DeFuniak Springs (June 1-July 31)|
|Miami (October 1-March 31)|
|Naples (January 1-April 30)|
|Illinois||Chicago (October 1-November 30; March 1-September 30)|
|Louisiana||New Orleans (October 1-June 30)|
|Maine||Bar Harbor (July 1-August 31)|
|Maryland||Baltimore City (March 1-November 30; March 1-September 30)|
|Cambridge/St. Michaels (June 1-August 31)|
|Montgomery and Prince George’s Counties|
|Ocean City (June 1-August 31)|
|Falmouth (July 1-August 31)|
|Martha’s Vineyard (July 1-August 31)|
|Nantucket (June 1-September 30)|
|New Hampshire||Conway (July 1-August 31)|
|New York||Glen Falls (July 1-August 31)|
|Lake Placid (July 1-August 31)|
|New York City|
|Saratoga Springs/Schenectady (July 1-August 31)|
|Tarrytown/White Plains/New Rochelle|
|North Carolina||Kill Devil (June 1-August 31)|
|Pennsylvania||Philadelphia (October 1-November 30, March 1-June 30, September 1-September 30)|
|Rhode Island||Jamestown/Middletown/Newport (October 1-October 31; May 1-September 30)|
|South Carolina||Charleston (March 1-May 31)|
|Utah||Park City (December 1-March 31)|
|Virginia||Arlington and Fairfax Counties|
|Virginia Beach (June 1-August 31)|
|Wyoming||Jackson/Pinedale (July 1-August 31)|
- Source: IRS