If you travel a lot for work, there’s a good chance that your job reimburses you through per diem expenses. These expenses cover food and lodging expenses.
Recently, the IRS made some changes to these expenses and the amount that an employee can receive without having to include it as income on their tax returns. In this article, we’re going to look at what IRS per diem rates are, how they impact employees and employers, and discuss changes to the high-cost localities list.
What Are Per Diem Expenses?
In Latin, per diem means “per day,” so per diem expenses is a daily allowance for visiting somewhere for work purposes. Per diems cover travel both inside of the United States and abroad.
To stop the IRS from considering these expenses taxable wages, the amount the employee receives must be at or below the federal limit. The employee must also provide an expense report. Without a complete expense report, the employee must pay taxes on the money they receive, which is why it’s always important to keep receipts when traveling for work.
Using the high-low substantiation method, per-diem rates are $297 for travel to any high-cost locality and $200 for any other locality in the continental United States.
The per diem amount gets separated into lodging and meal and incidental expenses (M&IE) and cover meals, dry cleaning, room service, and tips for restaurant staff.
The amount of allowed per diem varies from state-to-state, and each area within a state has different rates as well since the cost of traveling somewhere varies. For example, it costs more money to travel to San Fransico than it does in Redding, so you’ll get a slightly higher per diem in the Bay Area. There are currently around 400 areas listed as high-cost.
For those in the transportation industry, they receive special M&IE rates. The amount of this expense is $66 for anywhere inside of the continental United States and $71 for anywhere outside of the lower 48 states.
Incidental expenses, which covers fees and tips to porters, hotel staff, and staff on ships, has remained at $5 since 2012. These expenses no longer cover the travel costs between where you sleep and eat, postage costs for filing expense reports, and paying charge card billings. For these expenses, you’re better off asking your employer to reimburse you directly.
Freelancers and self-employed persons can only use the per diem rates for meal costs, but they can still deduct the expenses of traveling for work-related reasons. The best practice for any self-employed person is to use a tax professional when filing to ensure they get all possible deductions.
Changes To High-Cost Localities
There are two classifications for high-cost localities. Most areas stay in this category for the entire fiscal year, but some areas are only on the list for part of the year. This year, the locations added to the year-round list of high-cost localities include:
- Mill Valley/San Rafael/Novato, California
- Crested Butte/Gunnison, Colorado
- Petoskey, Michigan
- Big Sky/West Yellowstone/Gardiner, Montana
- Carlsbad, New Mexico
- Nashville, Tennessee
- Midland/Odessa, Texas
Traveling to these areas this year will give business travelers a little extra money to spend while they are there. There were also areas taken off of the list of high-cost localities, including:
- Los Angeles, California
- San Diego, California
- Duluth, Minnesota
- Moab, Utah
- Virginia Beach, Virginia
Travelers to these locations might find it surprising that they aren’t on the list anymore. If you’re traveling to one of these areas, ask your employer if they will reimburse you the difference between last year’s rate and this year’s rates.
In the past, employees could only deduct expenses that were over 2% of their adjusted gross income. If you made $100,000, the first $2,000 of unreimbursed payments were on you. After the Tax Cuts and Jobs Act, though, there have been significant changes to the amount you can claim.
The bill eliminated the 2% floor, meaning that frequent travelers can save thousands. However, you can no longer use the standard business mileage rate to deduct unreimbursed travel expenses unless you are an active military member, a performing artist, or a state or federal employee paid on a fee basis.
How To Lower Your Tax Liability
When traveling, it’s important to know how much your per diem is. The different rates for each location can get confusing, so it’s important to speak to your company’s officers before you leave.
When traveling, make sure you save all your receipts. These receipts aren’t only for your business when it comes time to file a personal expense report, but they will help you come tax time as well.
Create a spreadsheet that shows what you spend and what you get reimbursed for. You need to be as specific as possible when listing expenses, and keep your receipts in a file.
When you claim unreimbursed expenses, the IRS might audit you and demand proof of what you’ve claimed. You’ll need to provide receipts for everything. It’s good practice to keep your receipts for three years of tax returns to make sure you’re covered.
If you travel frequently enough to claim unreimbursed expenses yearly, talk to a tax professional when filing your taxes. Getting professional help will maximize your deductions and either lower your liability or possibly get you a return.
Get The Professional Help You Need With IRS Per Diem Rates
Frequent travelers should always get professional help when filling out their taxes. Not only are their returns more complicated, but the tax regulations that they have to follow often change every year. Our team brings more than four decades of experience to the table, and we’re always on standby ready to help you with your taxes.
Contact our tax professionals today to help you avoid audits. If you’re currently under audit, our team will respond within 24 hours to help defend you against the IRS.
Get in touch with us today and see how we can help you with IRS per diem rates and your taxes.