20.33 Per Diem Travel Allowance Under Accountable Plans
Instead of providing a straight reimbursement for substantiated out-of-pocket travel expenses, an employer may use a per diem allowance to cover meals, lodging, and incidental (20.4) expenses of employees on business trips away from home. If you are not related to the employer, you do not have to give your employer proof of your actual expenses if you receive a per diem allowance or reimbursement that is equal to or less than the federal travel rate for the particular area. You do have to account for the time, place, and business purpose of your travel. If you do not provide such an accounting for some travel days, you must be required to return the per diem allowance received for such days in order for the employer’s plan to qualify. If these tests are met, the allowance satisfies the accountable plan (20.32) requirements and it does not have to be reported as income on your Form W-2.
Tables published by the government show the federal travel rate for areas within the continental U.S. (called CONUS locations) and for areas outside the continental U.S., including Hawaii and Alaska (called OCONUS locations). New CONUS tables are released every October, effective for the government’s October 1–September 30 fiscal year (20.4). The best way to obtain the CONUS per diem rates is from IRS Publication 1542, available online at www.irs.gov/formspubs. The rates are also available from the General Services Administration website at www.gsa.gov. The OCONUS rates can also be accessed from the GSA website.
High-low method.
For business trips within the continental United States (CONUS), employers may use the IRS’s “high-low” method to reimburse employees for lodging, meals, and incidental expenses instead of using the locality-by-locality per diem CONUS rates set by the General Services Administration (GSA) for federal government workers. For each employee, either the federal per diem rates or the high-low method has to be used for the entire year.
For the period beginning October 1, 2011 and ending September 30, 2012, the rate for most areas within CONUS was $163 per day and the rate for designated high-cost areas was $242 per day. For employer deduction purposes, $65 of the $242 high-cost-area rate, and $52 of the $163 rate for other localities, must be allocated to meals. Only 50% of the allocated meals portion is generally deductible (20.24). The meal deduction percentage is 80% for meal costs of transportation workers such as pilots and interstate truck/bus drivers who are subject to Department of Transportation limits on service hours.
The $163 and $242 rates and the areas treated as high-cost areas are scheduled to change effective October 1, 2012. After the IRS determines the changes, it will revise Publication 1542 (available only online at www.irs.gov/formspubs) and provide tables showing the new high-cost areas for the period beginning October 1, 2012, as well as the areas for the period before October 1. The tables show if the area qualifies as a high-cost locality for the whole year or only during specific months. Transition rules require employers that used the high-low rates for a particular employee during the first nine months of 2012 to continue to use the high-low method for that employee for the remainder of 2012. The employer may use the new rates and localities that took effect October 1, or the pre-October high-low rates and high-cost localities can be used for the last three months provided that the prior rates and localities are used for all employees who are reimbursed under the high-low method. An employer may not use the high-low method until 2013 for an employee whose pre-October expenses for business trips within CONUS were reimbursed using the locality-by-locality per diem CONUS rates set by the General Services Administration (GSA) for federal government workers.
Employees related to the employer.
The IRS per diem rules that allow you to avoid accounting for actual expenses do not apply if you work for a brother, sister, spouse, parent, child, grandparent, or grandchild. They also do not apply if you are an employee-stockholder who owns more than 10% of the company’s stock.
Caution
Reporting a per diem allowance.
If the allowance does not exceed the federal travel rate or IRS high-low rate, the reimbursement is not reported on Form W-2. If your expenses do not exceed the reimbursement, you do not have to report the expenses or the reimbursement on your tax return; see Example 1 below. If your expenses exceed the allowance, you may deduct the excess by reporting the expenses and reimbursement on Form 2106. The net amount from Form 2106, after applying the 50% reduction for meals, is claimed on Schedule A as a miscellaneous expense subject to the 2% AGI floor; see Example 2 below.
If the allowance exceeds the federal rate, the allowance up to the federal rate is reported by the employer in Box 12 of your Form W-2, using Code L. This amount is not taxable. However, the excess allowance will be included as wages in Box 1 of your Form W-2; see Example 3 below.
Allowance covering only meals and incidentals.
If your employer gives you a per diem allowance covering only meals and incidental expenses, it is not taxable to you if you are not related to the employer and the allowance does not exceed the IRS meal allowance rate for that locality (M&IE rate; see 20.4). Alternatively, for travel within CONUS, your employer may use the high-low method to substantiate the allowance, in which case the allowance will not be taxable to you if it does not exceed $65 for high-cost localities and $52 for other areas.