The IRS has just released a notice updating the per diem rates taxpayers can use to substantiate lodging, meals and incidental expenses incurred on business trips. The rates took effect October 1st 2016.

Per diem explained

Since business travelers have a lot of expenses to keep track of (hotels, meals, etc.) the IRS allows employers to pay employees per diem rates, or daily allowances to compensate for meals, lodging, and incidental expenses (includes fees and tips paid to porters, baggage carriers, hotel staff, and ship staff, room service, laundry, dry cleaning). This allows travelers to avoid lengthy and burdensome recordkeeping requirements for expenses. The rates vary depending on where your employees travel.

Per diem rates are not considered part of the employee’s taxable wages, as long as the employee provides an expense report and the payments do not exceed the federal per diem rate.

More about the notice

Notice 2016-58 outlines the new per diem rates for travel expenses, along with some new rules about what qualifies as an “incidental expense”.

Here’s what’s new:

• Transportation between lodging, business, and dining locations are no longer considered “incidental”.
• Also, the mailing cost of filing travel vouchers and employer sponsored charge card billings are no longer included under incidental expenses, either.
• Taxpayers using per diem rates can separately deduct or be reimbursed for mailing and transportation expenses.

The new rates

The IRS establishes a yearly flat rate for certain areas with higher costs of living—known as the high-low substantiation method. Areas are considered “low cost” if they are not listed as “high cost”.

So, starting October 1st, 2016....

• The per diem rate for travel to any high-cost location is $282, up from $275 last year.
  • This rate broken down?--$68 for meals, and $214 for lodging.
• Travel to any other locality (low-cost) is now $189, up from $185 last year.
  • This rate broken down?--$57 for meals, and $132 for lodging.
• Incidental expense allowances remain at $5 per day for any location.

What areas are considered “high cost”?

Notice 2016-58 lists all high-cost localities. Check out pages 3-6 for the full list.

The IRS is extremely critical of business travel expense—it’s easy for a dishonest employee to take advantage. It’s best to consult your tax advisor to make sure your business and employees are complying with all the regulations listed above. Per diem rates can help cut down recordkeeping requirements and other complications associated with logging receipts and all expenses...but you have to be mindful of IRS scrutiny.

Questions? Contact us.