New Business Travel Per Diem Rates Are Effective on October 1

Many people have started traveling for business purposes after these activities were temporarily suspended during the COVID-19 pandemic. Now may be a good time to review — and possibly simplify — how your company reimburses its workers for out-of-town lodging, meals and incidental expenses.

One simplified alternative is the high-low method. Instead of reimbursing employees for the actual travel costs, this method provides fixed travel per diems. These amounts are based on IRS-approved rates that vary from locality to locality. Here are the details.

The Basics

Under the high-low method, the IRS establishes an annual flat rate for certain areas with higher costs of living. All the locations within the continental United States that aren't listed as "high-cost" automatically fall into the "low-cost" category. The high-low method may be used in lieu of the specific per diem rates for business destinations. Examples of high-cost areas include San Francisco, Boston and Washington, D.C. (See the chart below for a complete list by state.)

Under some circumstances — for example, if an employer provides lodging or pays the hotel directly — employees may receive a per diem reimbursement only for their meals and incidental expenses. There's also a $5 incidental-expenses-only rate for employees who don't pay or incur meal expenses for a calendar day (or partial day) of travel.

The following items aren't considered incidental expenses:

• Transportation between places of lodging or business and places where meals are taken, and
• The mailing cost of filing travel vouchers and paying employer-sponsored charge card billings.

Consider reimbursing employees separately for these expenses, and then deducting the amounts as ordinary business expenses.

Recordkeeping Requirements

If your company uses per diem rates, employees don't have to meet the usual recordkeeping rules required by law. Receipts of expenses generally aren't required under the per diem method. Instead, the employer simply pays the specified allowance to employees.

But employees still must substantiate the time, place and business purpose of the travel. Per diem reimbursements generally aren't subject to income or payroll tax withholding or reported on the employee's Form W-2. It's also important to note that per diem rates can't be paid to individuals who own 10% or more of the business.

What's New in 2022?

The IRS recently updated the per diem rates for business travel for fiscal year 2022, which starts on October 1, 2021. Under the high-low method, the per diem rate for all high-cost areas within the continental United States is $296 for post-September 30, 2021, travel (consisting of $222 for lodging and $74 for meals and incidental expenses). For all other areas within the continental United States, the per diem rate is $202 for post-September 30, 2021, travel (consisting of $138 for lodging and $64 for meals and incidental expenses). Compared to the prior simplified per diems, both the high- and low-cost area per diems have increased $4.

The IRS also modified the list of high-cost areas for post-September 30 travel. Hilton Head, S.C., has been added to the high-cost list, and Gulf Breeze, Fla., has been removed from the previous list of high-cost localities. In addition, certain tourist-attraction areas only count as high-cost areas on a seasonal basis. Starting on October 1, the portion of the year in which Jamestown/Middletown/Newport, R.I., is a high-cost locality has changed.

Important: This method is subject to various rules and restrictions. For example, companies that use the high-low method for an employee must continue to use it for all reimbursement of business travel expenses within the continental United States during the calendar year. The company may use any permissible method to reimburse that employee for any travel outside the continental United States, however.

For travel during the last three months of a calendar year, employers must continue to use the same method (per diem method or high-low method) for an employee as they used during the first nine months of the calendar year. Also, employers may use either:

1. The rates and high-cost localities in effect for the first nine months of the calendar year, or
2. The updated rates and high-cost localities in effect for the last three months of the calendar year, as long as they use the same rates and localities consistently for all employees reimbursed under the high-low method.

CAA Temporarily Suspends Limits on Meals Deductions

In terms of deducting amounts reimbursed to employees on a company's tax return, employers normally must treat meals and incidental expenses as a food and beverage expense that's subject to the 50% deduction limit on meal expenses. For certain types of employees — such as air transport workers, interstate truckers and bus drivers — the percentage is 80% for food and beverage expenses related to a period of duty subject to the hours-of-service limits of the U.S. Department of Transportation.

Important: Under the Consolidated Appropriations Act (CAA), for 2021 and 2022 only, business meals provided by restaurants are 100% deductible, subject to the considerations identified in preexisting IRS regulations. Until the IRS issues additional guidance on the CAA COVID-relief provision, some issues will remain unclear. For example, do bars that serve food count as restaurants? Presumably they do, but IRS guidance is needed to answer that question. Starting in 2023, the previous limits on deducting business meals while traveling will resume.

Time for a Change?

As your employees hit the road (or return to the friendly skies), it may be a good time to update your overall travel guidelines and consider switching to the high-low method. Though the list of high-cost localities varies slightly from year to year, this method can reduce the time and frustration associated with submitting traditional travel reimbursement forms. Contact your tax advisor for more information.

Reimbursing Travel Expenses the Old-Fashioned Way

Reimbursing and substantiating business travel expenses can be a cumbersome, time-consuming process if employees must keep track of actual expenditures. Here's how it traditionally works.

1. The employee collect receipts as he or she travels and maintains records that note the time, place and business purpose of each expenditure.
2. The employee submits an expense report at the end of the month for expenses that were incurred.
3. A supervisor reviews and approves the month-end expense report. There sometimes may be administrative delays, if documentation is incomplete or the supervisor questions the business purpose (or reasonableness) of an expense item.
4. The employee is reimbursed for the approved travel expenses.

Employers must hold on to all this documentation for several years in case the IRS inquires about business travel deductions.

Employees who travel frequently often list submitting expense reports as one of their most dreaded tasks. Procrastination is common when submitting expense reports — and sometimes busy workers fall months behind on getting expenses reimbursed. That can make it hard to recreate the necessary documentation to support business travel deductions.

Plus, some workers may resent being asked to "front" travel expenses with their personal funds until their expense reports are approved. Companies that switch to a fixed per-diem method of reimbursing travel costs can simplify matters for everyone involved. Ask your tax advisor which method is more appropriate for your business.