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IRS Updates Rules, Per Diem Rates for Business Travel Expenses by Andreea Cioara, CPA

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Posted on January 21, 2020 by Andreea Cioara

The IRS recently updated the daily rates that employers may use to reimburse their employees for the ordinary and necessary expenses incurred when traveling for business purposes, including the costs that workers pay out of their own pockets for lodging, meals and entertainment, rental cars and car-share services.

In general, companies have two options when reimbursing employees for certain travel expenses:

Repayments generally are tax-free to the employee. However, any amount above the per diem rate or without an expense report will be considered taxable income to the employee.

The Treatment of Per Diem Rates under the New Tax Law

 The per-diem rates are especially important for tax years 2018 through 2025, during which time, the Tax Cuts and Jobs Act (TCJA) disallows most employee-taxpayers from claiming miscellaneous itemized deductions, including unreimbursed costs incurred while traveling for business purposes. To account for the loss of this tax-benefit and recoup even a portion of the money they spend when performing duties for their jobs, employees may request reimbursements for business-travel expenses.

For employers, it is important to remember that the TCJA disallows deductions for entertainment, amusement, or recreational expenses paid or incurred after Dec. 31, 2017. An exception to this rule applies to business meals for which food and beverages are bought separately from the entertainment, or the food and beverage expenses are broken-out separately from the cost of the entertainment. Companies that meet these guidelines and incur separate costs for ordinary and necessary business-related meals with clients can continue to deduct 50 percent of those costs.

The Updated Per Diem Rates

Effective Oct. 1, 2019, through Sept. 30, 2020, the per-diem rate for travel to high-cost localities is $297, and $200 for travel to any other locality within the continental United States. The rate for the meals-only portion of business-travel expenses is $71 for high-cost localities and $60 for any other area within the continental U.S. High-cost localities, where the cost of living is higher during all or a portion of the year, include New York City, San Francisco and Washington D.C.  For the current period, the federal per diem rate of $248 or more applies to an updated list of localities.

For taxpayers who work in the transportation industry, the per diem rates for meals and incidental expenses, such as laundry and dry cleaning services 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 region. These expenses include all meals, laundry and dry-cleaning services, as well as tips provided to food servers, porters, baggage handlers and other hotel employees.

With the rise of the mobile workforce, it is more important than ever for businesses to establish and implement written employee 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: Andreea Cioara, CPA, is a director in the Tax Service practice with Berkowitz Pollack Brant Advisors + CPAs, where she provides clients with corporate-tax planning through all phases of business operations, including formation, debt restructuring, succession planning and business sales and acquisitions. She can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000, or via email at info@bpbcpa.com.

 

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.