Per diem rates allow companies to document business travel expenses without having to collect receipts, monthly expense reports, and other bothersome administrative paperwork. As an alternative to reimbursing employees for expenses they incur while traveling, employers can pay them a per diem amount, or daily allowance, for lodging, meals and incidentals. The rates are IRS approved and vary depending on where your employees travel. Instead of the usual record keeping requirements for business travel, per diem rates allow you to pay the specified amount to employees without any extensive paperwork. The only thing you need to have record of is the time, place, and business purpose of the trip.
The high low method
The IRS establishes an annual flat rate for certain areas with higher costs of living under something called the “high-low method”. Locations within the continental U.S. that are not listed as “high-cost” are automatically placed on the “low-cost” list.
What’s new for 2016?
- The per diem rate for all high-cost areas within the continental U.S. increased $16 from its prior rate and is now $275; $207 for lodging and $68 for meals and incidentals.
- The per diem rate for all low-cost areas within the continental U.S. increased $13 from its prior rate and is now $185; $128 for lodging and $57 for meals and incidentals.
- Cost of traveling between places of lodging or business, and places where employees dine out are not considered incidental expenses.
- Mailing expenses resulting from filing travel vouchers and paying employer-sponsored charge card billings are not considered incidental expenses.
- The list of high-cost areas has been updated (pages 3-5 of IRS Notice 2015-63)
Other things to know:
- The per diem rate cannot be paid to individuals who own 10% or more of the business.
- If you use the high-low method for an employee, you have to keep using it for all business travel reimbursement (within the continental U.S.) for the entire calendar year.
- You have to continue using the same method (per diem or high-low) for an employee’s travel reimbursement in the last three months of the calendar year that you used during the first nine.
- When deducting reimbursed amounts to employees on your company’s tax return, you have to treat meals and incidental expenses as a food and beverage expense subject to the 50% deduction limit on meal expenses.
- Since the IRS is highly critical of business travel expense reporting, per diem substantiation might be a helpful alternative for your business, considering the simplified recordkeeping requirements.
It is best to contact your tax adviser if you are unsure whether your company should use per diem rates to reimburse employees.
Note: Louisville is a low-cost area, so until September 30, 2016 you can pay travelers up to $128 a day for lodging and $57 for meals and incidentals without requesting any receipts or additional paperwork, and the amount paid will not be taxed to the employee. Please note you have to document the time, place and business purpose of the trip in order for the IRS to allow it. That is something you’ll want to document now instead of later.
New rates take effect October 1, 2016, so check back for an update on those rates when they are published.