IRS issued Notice 2020-71 which contains the special per-diem rates for taxpayers to use, after 9/30/2020, to substantiate ordinary and necessary business travel expenses. 

Background

An employer may pay a per-diem amount to an employee on business-travel status instead of reimbursing actual substantiated expenses for away-from-home lodging, meal and incidental expenses (M&IE). If the rate paid doesn’t exceed IRS-approved maximums, and the employee provides simplified substantiation (time, place, and business purpose):

• the reimbursement is treated as made under an accountable plan (e.g. it isn’t subject to income or payroll-tax withholding),

• it isn’t reported on the employee’s Form W-2, and

• receipts for expenses aren’t required.

In general, the IRS-approved per-diem maximum is the General Services Administration (GSA) per-diem rate paid by the federal government to its workers on travel status. This rate varies from locality to locality. These rates, in effect for the federal government’s fiscal year period beginning 10/1/2020, may be found at http://www.gsa.gov.

However, in applying the per-diem, M&IE, and incidental-expenses-only allowances, an employer may continue using the CONUS (continental U.S.) rates that were in effect for the first nine months of 2020 for CONUS expenses in all of 2020, instead of using the GSA rates that are effective 10/1/2020, provided that the employer consistently uses those rates for the last three months of 2020.

“Incidental Expenses” Defined

The term “incidental expenses” has the same meaning as in the Federal Travel Regulations, 41 CFR 300-3.1, (fees and tips given to porters, baggage carriers, hotel staff, and staff on ships).  As such, future changes to the definition of incidental expenses in the Federal Travel Regulations would be announced in the annual per-diem notice. 

Observation: Unreimbursed transportation costs, when incurred by an employee, are miscellaneous itemized deductions subject to 2% of AGI which are temporarily disallowed for tax years 2018 through 2025.

High-low rates

A payor that pays a per-diem allowance in lieu of reimbursing actual expenses an employee pays or incurs or will pay or incur for travel away from home may use the high-low substantiation method in lieu of the per-diem substantiation method or the M&IE-only method.

• Under the high-low substantiation method, there is one uniform per-diem rate for all “high-cost” areas within CONUS, and another per-diem rate for all other areas within CONUS.

• Under the high-low method for post-9/30/2020 travel, the high-cost-area per diem is $292 (down from $297), consisting of $221 for lodging and $71 for M&IE.

• The per-diem for all other localities is $198 (down from $200), consisting of $138 for lodging and $60 for M&IE.

Changes in high-low per-diem localities

The following changes have been made to the list of high-cost localities:

Localities added to the list

• Los Angeles, California
• San Diego, California
• Gulf Breeze, Florida
• Kennebunk/Kittery/Sanford, Maine
• Virginia Beach, Virginia

Localities which have changed the portion of the year in which they are high-cost localities

• Sedona, Arizona
• Monterey, California
• Santa Barbara, California
• District of Columbia (see also Maryland and Virginia)
• Naples, Florida
• Jekyll Island/Brunswick, Georgia
• Boston/Cambridge, Massachusetts
• Philadelphia, Pennsylvania
• Jamestown/Middletown/Newport, Rhode Island
• Charleston, South Carolina

Localities removed from the list

• Midland/Odessa, Texas
• Pecos, Texas

Limitation

A payor that uses the high-low substantiation method for an employee must use that method for all amounts paid to that employee for travel away from home within CONUS during the calendar year. The payor may use any permissible method, such as:

• actual expenses
• the per-diem substantiation method, or
• the M&IE-only per-diem substantiation method

to reimburse that employee for any CONUS travel away from home.

Transition rules

For travel in the last three months of a calendar year (i.e. 10/1 – 12/31):

• a payor must continue to use the same method (per-diem method, or high-low method) for an employee as the payor used during the first nine months of the calendar year (1/1 – 9/30); and

• a payor may use either the rates and high-cost localities in effect for the first nine months of the calendar year (1/1 – 9/30) or the updated rates and high-cost localities in effect for the last three months of the calendar year 10/1 – 12/31) if the payor uses the same rates and localities consistently for all employees reimbursed under the high-low method.

Employer’s deduction for high-low per-diem

A payor must treat M&IE allowances as a food and beverage expense subject to the 50% deduction limit on meal expenses. 

The percentage is 80% for food and beverage expenses of certain individuals (e.g., air transport workers, interstate truckers, bus drivers) during or incident to a period of duty subject to the hours-of-service limits of the Department of Transportation.

This amount is deemed substantiated if the taxpayer substantiates the time, place, and business purpose of the travel for that day (or partial day). The incidental-expenses-only per-diem can’t be used by payors that use a per-diem or M&IE-only per-diem method (see below), or by employees or self-employed individuals who use the M&IE-only per-diem method. The incidental-expenses-only per-diem is not subject to the 50% deduction limit on business meals.

M&IE-only per-diem

Under some circumstances, an employee may receive a per-diem reimbursement only for his or her M&IE for travel away from home. If simplified substantiation is supplied (time, place, business purpose), and one of several conditions is met (e.g., payor provides lodging in kind or pays the service provider directly for lodging), the amount paid is deemed paid under an accountable plan as long as the rate does not exceed the federal M&IE rate for the locality of travel for the period when the employee is away from home. Similar rules apply to self-employed individuals who pay or incur meal expenses.

Transportation industry per diem

Effective 10/1/2020, taxpayers in the transportation industry paying (or deducting) an M&IE-only per-diem may treat $66 (same as previous year’s rate) as the M&IE rate for all localities within CONUS and $71 (same as previous year’s rate) as the M&IE rate for all localities outside of CONUS.

Taxpayers that used the federal M&IE rates or the special transportation industry rates during the first nine months of a calendar year (e.g., 2020) to reimburse an individual can’t switch to the other method for that individual until Jan. 1 of the next year (e.g., 2021).

(This is Blog Post #919)