If you use federal per diem rates to reimburse employees for business-travel expenses, make sure you’re utilizing the updated IRS per diem rates, which went into effect Oct. 1, 2017. The new rates apply for any business-related travel expenses incurred on or after October 1 through Sept. 30, 2018.
In Notice 2017-54, the IRS detailed the 2017-2018 per diem rates that can be used for reimbursement of ordinary and normal business expenses incurred while employees travel away from home. It also revised the list of high-cost localities for use in the high-low substantiation method. The per diem rates, which are established by the General Services Administration (GSA), are annually updated before the end of the federal government’s fiscal year (September 30) and released for use in the following year. Although the rates are set by the GSA to cover travel by government employees, private employers may also use them for their employees.
Reimbursements are generally tax-free to employees as long as they properly account for their business-travel expenses. But keeping track of actual costs can be a logistical nightmare. Government-approved per diem rates allow employees to be reimbursed at a set amount rather than forcing them to keep up with receipts for all of their expenses while traveling. Both employees and employers often prefer this simplified recordkeeping solution.
Here’s how the per diem method works: Assuming that the travel qualifies as a business expense, the employer simply pays the employee the per diem allowance designated for the specific travel destination. The employee doesn’t have to report the payments on his or her personal tax return but still must substantiate the time, place and business purpose of the travel.
The rates are updated annually for the following areas:
- The 48 states in the continental United States and the District of Columbia (the “CONUS” rates),
- Certain areas outside the continental United States, including Alaska, Hawaii, Puerto Rico and U.S. possessions (the “OCONUS” rates), and
- Foreign countries outside the CONUS and OCONUS areas.
You can find up-to-date per diem rates for specific localities on the GSA website.
Employers may also opt to use the high-low substantiation method, which divides localities into high-cost and low-cost areas. This method simplifies the expense reimbursement process even further, as it provides only two per diem rates — one for high-cost localities and another for low-cost localities.
What do per diem rates cover?
Airfare and other transportation costs aren’t covered by the per diem rates. (However, those expenses can be either paid by the employer directly or reimbursed to the employee at actual cost.) Per diem does cover costs for lodging and meals and incidental expenses (M&IE). For this purpose, M&IE includes:
- meals and room service
- laundry and dry cleaning
- fees and tips given to porters, baggage carriers, hotel staff and staff on ships
Typically, if an employer chooses to use per diem rates, it uses them for all employees who regularly travel on business. However, per diem rates for lodging can’t be used by an employee who owns, either directly or indirectly, more than 10 percent of the company. Instead, these owners must keep track of the actual amount of those business-travel expenses and retain their receipts. For M&IE, those who own more than 10 percent of the company are permitted to use the per diem rates.
What’s new in fiscal year 2018?
For fiscal year 2018 — which spans Oct. 1, 2017, through Sept. 30, 2018 — the per diem rate for high-cost areas has risen to $284, an increase of $2 over the prior year. This rate consists of $216 for lodging and $68 for M&IE.
The per diem rate for low-cost areas also increased by $2. The low-cost per diem rate is $191, including $134 for lodging and $57 for M&IE.
As usual, the list of cities (and their surrounding areas) included on the list of high-cost areas has been tweaked, and the time periods for which some of the seasonal areas will be included as high-cost areas have been revised. The changes are as follows:
- High-cost areas – added Fort Myers, Fla; Lewes, Del.; Oakland, Calif.; Hyannis, Mass; Petoskey, Mich.; Vancouver, Wash; and Portland, Ore.
- High-cost areas – removed Sedona, Ariz.; Los Angeles, Calif.; Vero Beach, Fla.; and Kill Devil, N.C.
- Modified time periods – Aspen, Colo.; Denver/Aurora, Colo.; Telluride, Colo.; Vail, Colo.; Bar Harbor, Maine; Ocean City, Md.; Nantucket, Mass.; Philadelphia, Pa.; Jamestown/Middletown/Newport, R.I.; and Jackson/Pinedale, Wyo.
Timing is everything
For the last three months of calendar-year 2017, employers may either switch to the new rates or continue with the rates they have been using for the first nine months of 2017. Regardless of their selection, employers must select one year’s set of rates for this quarter and stick with it. They can’t use 2016-2017 rates for some employees and 2017-2018 rates for others.
Likewise, employers can’t use the 2016-2017 list of high-cost areas for some reimbursements and the 2017-2018 list for others. It is important to note that employers that used the high-low substantiation method for the first nine months of the calendar year must continue using the same method through Dec. 31, 2017. Switching methods mid-year is not permitted.
Because business-travel expenses often attract IRS scrutiny, they require detailed, accurate recordkeeping. The per diem and high-low methods can make recordkeeping less burdensome, but they’re not the best solution for all employers. If you have questions regarding the expense substantiation methods, please give us a call.