Business travelers have a lot of expenses to keep up with from hotels to taxis to tips. To keep things simple, the Internal Revenue Service (IRS) allows the use of per diem (Latin meaning "for each day") rates. Per diem rates are the equivalent of a fixed amount paid to employees to compensate for lodging, meals, and incidental expenses incurred when traveling on business rather than using actual expenses. These rates are also used for federal income tax purposes.
Here's how it typically works: a per diem rate can be used by an employer to reimburse employees for combined lodging and meal costs, or for meal costs alone. Those per diem payments are not considered part of the employee’s wages for tax purposes so long as the payments are equal to or less than the federal per diem rate and the employee provides an expense report. If the employee doesn't provide a complete expense report, payments will be taxable to the employee. Similarly, any payments which are more than the per diem rate will also be taxable.
Travel expenses are deductible to the extent they are considered business expenses, meaning they are ordinary and necessary expenses of traveling away from home for your business, profession, or job. You are considered to be traveling away from home if you are required to be away from your tax home for a period substantially longer than an ordinary day's work, and you need to get sleep or rest to meet the demands of your work while away. Remember that you can't deduct expenses eligible for reimbursement under an employer accountable plan - even if you didn't claim the reimbursement. However, if your actual expenses exceed the per diem rate, you may itemize your deductions on your return to deduct the excess.
It's worth noting that transportation between where you sleep or work and where you eat, as well as the mailing cost of filing travel vouchers and paying employer-sponsored charge card billings, are no longer included in incidental expenses. If you want to snag a break for those, and you use the per diem rates, you may separately deduct those on your tax return or request that your employer reimburse you.
When it comes to self-employed persons, the per diem rates aren't as useful since the self-employed can only use per diem for meal costs. Realistically, that means that self-employed taxpayers must keep excellent records and use exact numbers.
Every year, rates are updated to reflect cost of living adjustments. New per-diem numbers are now out, effective October 1, 2017. These numbers are to be used for per-diem allowances paid to any employee on or after October 1, 2017, for travel away from home on or after that date. The new rates include those for the transportation industry; the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method.
As of October 1, 2017, the special meals and incidental expenses (M&IE) per diem rates for taxpayers in the transportation industry are $63 for any locality of travel in the continental United States and $68 for any locality of travel outside the continental United States. And yes, if you're rubbing your eyes, those are the same rates as last year. The per diem rate for meals & incidental expenses (M&IE) includes all meals, room service, laundry, dry cleaning, and pressing of clothing, and fees and tips for persons who provide services, such as food servers and luggage handlers.
The rate for incidental expenses only is $5 per day. Incidental expenses include fees and tips paid at lodging, including porters and hotel staff.
Since the cost of travel can vary depending on where - and when - you're going, there are special rates for certain destinations. For purposes of the high-low substantiation method, the per diem rates are $284 for travel to any high-cost locality and $191 for travel to any other locality within the continental United States. The meals & incidental expenses only per diem for travel to those destinations is $68 for travel to a high-cost locality and $57 for travel to any other locality within the continental United States.
You can find the list of high-cost localities for all or part of the calendar year in the most recent IRS notice. As you can imagine, high cost of living areas like San Francisco, Boston, New York City, and the District of Columbia continue to make the list. There are, however, a few noteworthy changes, including: