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The new per diem numbers are now out – a little earlier than normal. It’s important to note that they are not effective until October 1, 2020. These numbers are to be used for per diem allowances paid to any employee on or after October 1, 2020, for travel away from home.
The Internal Revenue Service (IRS) allows the use of per diem (that’s Latin meaning “for each day” – remember, lawyers love Latin) rates to make reimbursements easier for employers and employees. Per diem rates are a fixed amount paid to employees to compensate for lodging, meals, and incidental expenses incurred when traveling on business rather than using actual expenses.
Here’s How Per Diem Typically Works
A per diem rate can be used by an employer to reimburse employees for combined lodging and meal costs, or meal costs alone. Per diem payments are not 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, the payments will be taxable to the employee. Similarly, any payments which are more than the per diem rate will also be taxable.
Reimbursed & Unreimbursed Expenses
The reimbursement piece is key. Remember that unreimbursed job expenses are currently not deductible. The Tax Cuts and Jobs Act (TCJA) eliminated unreimbursed job expenses and miscellaneous itemized deductions subject to the 2% floor for the tax years 2018 through 2025. Those expenses include unreimbursed travel and mileage.
That also means that the business standard mileage rate (you’ll find the 2020 rate here) cannot be used to deduct unreimbursed employee travel expenses for the 2018 through 2025 tax years. The IRS has clarified, however, that members of a reserve component of the Armed Forces of the United States, state or local government officials paid on a fee basis, and certain performing artists may still deduct unreimbursed employee travel expenses as an adjustment to income on the front page of the 1040; in other words, those folks can continue to use the business standard mileage rate. For details, check out Notice 2018-42 (downloads as a PDF).
What about self-employed taxpayers? The TCJA didn’t change deductions for self-employed taxpayers (those that file a Schedule C). Self-employed taxpayers can still deduct business-related expenses. However, the per diem rates aren’t as useful for the self-employed because they can only use the per diem rates for meal costs. Realistically, that means that self-employed taxpayers must continue to keep excellent records and use exact numbers.
The New Numbers
As of October 1, 2020, the special meals and incidental expenses (M&IE) per diem rates for taxpayers in the transportation industry are $66 for any locality of travel in the continental United States and $71 for any locality of travel outside the continental United States; those rates are the same as they were last year. The per diem rate for meals & incidental expenses 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 remains $5 per day, no matter the location. Incidental expenses include fees and tips paid at lodging, including porters and hotel staff. Transportation between where you sleep or work and where you eat, as well as the 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 request that your employer reimburse you.
That’s good advice across the board: If you previously deducted those unreimbursed job expenses and can no longer do so under the TCJA, ask your employer about potential reimbursements.
Of course, 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 $292 for travel to any high-cost locality and $198 for travel to any other locality within the continental United States. The meals & incidental expenses only per diem for travel to those destinations remain $71 for travel to a high-cost locality and $60 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 – including the applicable rates – in the most recent IRS notice. There are, however, a few noteworthy changes, including:
- The following localities have been added to the list of high-cost localities: Los Angeles, California; San Diego, California; Gulf Breeze, Florida; Kennebunk/Kittery/Sanford, Maine; and Virginia Beach, Virginia.
- The following localities have been removed from the list of high-cost localities: Midland/Odessa, Texas, and Pecos, Texas.
- The following localities have changed the portion of the year in which they are high-cost localities (meaning that seasonal rates apply): Sedona, Arizona; Monterey, California; Santa Barbara, California; District of Columbia (see also Maryland and Virginia; Naples, Florida; Jekyll Island/Brunswick, Georgia; Boston/Cambridge, Massachusetts; Philadelphia, Pennsylvania; Jamestown/Middletown/Newport, Rhode Island; and Charleston, South Carolina.
You can find the entire list, together with other per diem information, in Notice 2020-71 (downloads as a PDF).
To find the federal government per diem rates by locality name or zip code, head over to the General Services Administration (GSA) website.