IRS Per Diem Rates
Employees are typically paid a Per Diem by their employer while traveling for business. However, businesses, business owners, sole-proprietors, contractors, and employees who are not otherwise paid a Per Diem while traveling away from home for business may claim a deduction on their taxes for the expenses incurred while traveling.
The U.S. Internal Revenue Service (IRS) does not set its own Per Diem rates. Rather, the IRS honors the Per Diem rates set by the General Service Administration (GSA) and the Department of State within their respective jurisdictions. In other words, the IRS allows taxpayers to use the established Per Diem rates to substantiate the amount spent while traveling away from home for business. This simplifies the process of substantiating traveling expenses by eliminating the need to tediously track each individual purchase and expenses incurred while traveling.
The standard Per Diem rates used by the IRS are set by the GSA and the Department of State. The GSA sets Per Diem rates within the continental United States (abbreviated as CONUS) and the Department of State set Per Diem rates for all locations outside of the continental United States including Alaska and Hawaii (known as OCONUS). Calculate your Per Diem Rates.
These Per Diem rates are the official rates given to Federal employees on business travel. However, private employers are free to reimburse their employees any amount for travel. The IRS uses the federally established rates to determine the maximum allowable deduction on income taxes. Additionally, any Per Diem rate paid above the standard rate is taxable income.
Per Diem is designed to cover the cost of Lodging and Meal & Incidental Expenses (abbreviated as M&IE) incurred during ordinary and necessary business travel. The IRS defers to the GSA to define what expenses are included in these expense categories.
Within the continental United States (CONUS) lodging Per Diem rates do not include taxes. This means that lodging taxes such as sales tax and room tax can be deducted as separate miscellaneous expenses. For travel outside the continental United States (OCONUS), the Per Diem rates established by the Department of State do include lodging taxes. Accordingly, separately deducted lodging taxes on OCONS travel are not allowed by the IRS.
M&IE covers the cost of meals and other incidental expenses incurred during travel. The exact expenses covered as "incidentals" are described in Federal Travel Regulations, Chapter 3, Part 003 (Per Diem Allowance) as "Fees and tips given to porters, baggage carriers, hotel staff, and staff on ships." This is a change to the previous regulations that included "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" as well. The IRS Notice 2014-57 notes that in accordance with the aforementioned changes, "taxpayers using per diem rates may separately deduct or be reimbursed for transportation and mailing expenses."
High-Low Substantiation Method
The IRS allows taxpayers to choose a second, simplified method for calculating per diem rates know as the High-Low Substantiation Method. The High-Low method applies only to the travel withing the continental United States. This method divides the county into two categories - either High Per Diem or Low Per Diem. There are only two different per diem rates instead of the more cumbersome, but more accurate 100+ GSA Per Diem rates. Based on the city you are traveling to, you either get paid the high or the low per diem.
Cities with a GSA Per Diem above a certain threshold will be designated as "High Per Diem" areas. All other areas are then "Low Per Diem" areas. The break down of High versus Low Per Diem areas as well as actual dollar amounts can be found in IRS Notice 2014-57.
As with the first method, any expenses that are not covered by Per Diem may be deducted separately.
IRS Per Diem Exceptions
The IRS allows you to deduct business travel expenses and considers Per Diem rates as reimbursement and therefore tax-free. You may use either of the Per Diem calculations methods outlined above to substantiate traveling expenses. In most cases, proof that your employer paid you a Per Diem is sufficient substantiation.
However, if the IRS considers you related to you employer then you must must be able to prove your expenses to the IRS even if you have already adequately accounted expenses to your employer.
A final note about reporting travel expenses to the IRS: You cannot change the method of Per Diem calculation in the middle of a tax-year. The IRS expects you to use either the GSA Per Diem method or the High-Low Substantiation Method for the entire year. This prevents someone from always choosing the most favorable method and simplifies reporting.