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IRS Confirms Annual Per Diem Rates for Business Travel Expense Reimbursement by Lewis Taub, CPA

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Posted on November 13, 2020 by Lewis Taub

The IRS updated the per diem rates companies should use beginning Oct. 1, 2020, to reimburse employees for business-travel expenses, including lodging, meals, entertainment and other incidentals. The guidance also includes special rates for travel to high-cost localities and for meals and incidental expenses (M&IE) incurred by members of the transportation industry.

The per diem rates make it easier for employers to reimburse workers for ordinary and necessary business-travel expenses based on a flat daily rate rather than requiring the calculation of actual costs incurred. Amounts equal to or less than the per diem rates are not treated as taxable wages provided employees submit detailed expense reports to the employer. Any employee who receives business travel expense reimbursement that exceeds the per diem rate will be responsible for paying taxes on that amount.

The per diem rates effective Oct. 1, 2020, have not changed substantially from the prior year.

For taxpayers in the transportation industry, the per diem rates for M&IE, such as laundry service, dry cleaning and/or tips to food servers, hotel employees or baggage handlers, remains at $66 for travel within the continental U.S. and $71 for travel outside the country. Incidental travel expenses, which no longer includes costs of transportation between the locations where you work, eat and sleep, remains at $5 per day.

For purposes of the high-low substantiation method, the per diem rates increase to $292 for travel to a high-cost locality and $198 for travel to any other locality within the continental U.S. The rates that apply solely to meals and incidental expenses remains at $71 per day in high-cost localities and $60 per day for any other area within the continental U.S. It is important taxpayers recognize that the IRS has modified the list of high-cost localities for which and when a per diem rate of $248 or more applies for the calendar year beginning Oct. 1, 2020.

It is important for both employees and their employers to remember that the Tax Cuts and Jobs Act (TCJA) modifies the treatment of business travel and entertainment expenses for tax years 2018 through 2025.

For example, the TCJA prohibits most employees from claiming deductions on their federal tax returns for miscellaneous itemized expenses, which includes unreimbursed business travel expenses. Therefore, the only way employees may recoup even a portion of their out-of-pocket business travel expenses is to receive some form of reimbursement from their employers.

For businesses, the TCJA eliminated deductions for expenses related to activities considered entertainment, amusement or recreation. However, the law carved out an exception to this rule, allowing businesses to deduct 50 percent of food and beverage costs that are purchased separately from nondeductible entertainment expenses and provided to a “person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.”

Both businesses and their employees should work together to establish and implement written expense-reimbursement policies. Moreover, companies should review those plans regularly to ensure they comply with a variety of federal and state laws, including the treatment of those expenses and repayments for tax purposes.

About the Author: Lewis Taub, CPA, is a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he works with entrepreneurial business, multinational and multi-state corporations on tax planning and compliance strategies, including those related to mergers and acquisitions, basis issues and debt restructuring. He can be reached at the CPA firm’s New York City office (646) 213-7600 or info@bpbcpa.com.