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Two years after the Tax Cuts and Jobs Act (TCJA) was signed into law, updated rules and regulations still emerge to address the most significant changes to the income tax for businesses and individuals in the last few decades.
Recently, the IRS issued guidance for business travelers, updated to include changes resulting from the TCJA. More precisely, Revenue Procedure 2019-48 updates the rules for using per diem rates to substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home.
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Although TCJA suspended the miscellaneous itemized deduction that employees could take for non-reimbursed business expenses, self-employed individuals and certain employees, such as Armed Forces reservists, fee-basis state or local government officials, eligible educators, and qualified performing artists, that deduct unreimbursed expenses for travel away from home may still use per diem rates for meals and incidental expenses, or incidental expenses only.
The revenue procedure makes it clear that TCJA amended prior rules to disallow a deduction for expenses for entertainment, amusement, or recreation paid or incurred after December 31, 2017. Otherwise allowable meal expenses remain deductible if the food and beverages are purchased separately from the entertainment, or if the cost of the food and beverages is stated separately from the cost of the entertainment.
The IRS annually issues guidance providing updated per diem rates. Notice 2019-55 provides the rates that have been in effect since October 1, 2019. The new rates are in effect from Oct. 1, 2019, to Sept. 30, 2020.
Taxpayers are not required to use a method described in this revenue procedure and may instead substantiate actual allowable expenses, provided they maintain adequate records.
It is now the right moment for a little background to the business travel expenses deduction and the “per diem rates” for business people and employees.
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Travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job. You cannot deduct expenses that are lavish or extravagant, or that are for personal purposes.
You're traveling away from home if your duties require you to be away from the general area of 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.
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Deductible travel expenses while away from home include, but aren't limited to, the costs of:
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| 1. |
Travel by airplane, train, bus or car between your home and your business destination. (If you're provided with a ticket or you're riding free as a result of a frequent traveler or similar program, your cost is zero.) |
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| 2. |
Fares for taxis or other types of transportation between the airport or train station and your hotel, the hotel and the work location, and from one customer to another, or from one place of business to another.
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| 3. |
Shipping of baggage and sample or display material between your regular and temporary work locations.
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| 4. |
Using your car while at your business destination. You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking fees. If you rent a car, you can deduct only the business-use portion for the expenses.
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| 5. |
Meals and lodging. |
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| 6. |
Dry cleaning and laundry. |
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| 7. |
Business calls while on your business trip. (This includes business communications by fax machine or other communication devices.)
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| 8. |
Tips you pay for services related to any of these expenses.
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| 9. |
Other similar ordinary and necessary expenses related to your business travel. (These expenses might include transportation to and from a business meal, public stenographer's fees, computer rental fees, and operating and maintaining a house trailer.)
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Per diem (which literally means “by the day” in Latin) is a daily rate employers give employees to cover business-related traveling expenses.
Employers can repay the actual expenses the employee incurs, or, can pay employees a standard per diem rate set by the IRS.
Even though the rate table was originally designed for federal employees, the IRS also uses it for private employers who want to provide employees with a daily budget for travel.
Per diem expenses are divided into the several categories: lodging expenses, mileage expenses, and meal & incidental expenses (abbreviated as M&IE).
The regular federal per diem rate is the highest amount that the federal government will pay to its employees for lodging, meals, and incidental expenses (or M&IE only) while they are traveling away from home in a particular area.
The rates are different for different locations. Employers should have these rates available and you can also find federal per diem rates at GSA.gov/Perdiem.
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High-low rate is a simplified method of figuring the federal per diem rate for travel within the continental United States. It eliminates the need to keep a current list of the per diem rates for each city.
The standard mileage rate is a set rate per mile that you can use to figure deductible car expenses. For tax year 2019, the standard mileage rate is of 58 cents for every business mile driven (3.5 cents increase from the previous year).
If your reimbursement is in the form of an allowance received under an accountable plan, the following facts affect your reporting: the federal rate, and whether the allowance or your actual expenses were more than the federal rate.
If your allowance is less than or equal to the federal rate, the allowance won’t be included in box 1 of your Form W-2. You don’t need to report the related expenses or the allowance on your return if your expenses are equal to or less than the allowance.
If your actual expenses are more than your allowance, you can complete Form-2106, Employee Business Expenses. Form 2106 is only used by Armed Forces reservists, qualified performing artists, fee-basis state or local government officials, and employees with impairment-related work expenses.
Due to the suspension of miscellaneous itemized deductions subject to the 2% floor under section 67(a), employees who do not fit into one of the listed categories may not use Form 2106.
If your allowance is more than the federal rate, your employer must include the allowance amount up to the federal rate under code L in box 12 of your Form W-2. This amount isn’t taxable. However, the excess allowance will be included in box 1 of your Form W-2. You must report this part of your allowance as if it were wage income.
For international travel, the U.S. Department of State establishes per diem rates for all foreign areas, including a maximum rate for lodging and a rate for meals & incidentals.
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If you want to make sure you comply with the current tax law and the latest IRS rules and regulations, help from a tax professional is both invaluable and necessary. And, of course, don’t miss out on our weekly newsletters.
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