In Notice 2020-71, the IRS recently announced per diem rates that can be used to substantiate the amount of business expenses incurred for travel away from home on or after October 1, 2020. Employers using these rates to set per diem allowances can treat the amount of certain categories of travel expenses as substantiated without requiring that employees prove the actual amount spent. (Employees must still substantiate the time, place and business purposes of their travel expenses.)\n\n\n\nThe amount deemed substantiated will be the lesser of the allowance actually paid or the applicable per diem rate for the same set of expenses. This notice, which replaces Notice 2019-55, announces:\n\n\n\nRates for use under the optional high-low substantiation method,Special rates for transportation industry employers, andThe rate for taxpayers taking a deduction only for incidental expenses.\n\n\n\nUpdated general guidance issued in 2019 regarding the use of per diems under the Tax Cuts and Jobs Act (TCJA) remains in effect.\n\n\n\nHigh-low method\n\n\n\nFor travel within the continental United States, the optional high-low method designates one per diem rate for high-cost locations and another for other locations. Employers can use the high-low method for substantiating lodging, meals and incidental expenses, or for substantiating meal and incidental expenses (M&IE) only.\n\n\n\nBeginning October 1, 2020, the high-low per diem rate that can be used for lodging, meals and incidental expenses decreases to $292 (from $297) for travel to high-cost locations and decreases to $198 (from $200) for travel to other locations. The high-low M&IE rates are unchanged at $71 for travel to high-cost locations and $60 for travel to other locations. Five locations have been added to the list of high-cost locations, two have been removed and 10 that remain on the list are now considered high-cost for a different portion of the calendar year.\n\n\n\nAlthough self-employed persons can\u2019t use the high-low method, they can use other per diem rates to calculate the amount of their business expense deduction for business meals and incidental expenses (but not lodging), or for incidental expenses alone. (Employees can no longer deduct their unreimbursed expenses because of the suspension of miscellaneous itemized deductions by the TCJA, so these other rates are effectively unavailable to them.) The special rate for the incidental expenses deduction is unchanged at $5 per day for those who don\u2019t pay or incur meal expenses for a calendar day (or partial day) of travel.\n\n\n\nA simpler process\n\n\n\nThe per diem rules can greatly simplify the process of substantiating business travel expense amounts. If the amount of an allowance is deemed substantiated because it doesn\u2019t exceed the applicable limit, any unspent amounts don\u2019t have to be taxed or returned. If an employer pays per diem allowances that exceed what\u2019s deemed substantiated, however, the employer must either treat the excess as taxable wages or require actual substantiation. When substantiation is required, any unsubstantiated portion of the allowance must be returned or treated as taxable wages. Please contact us to discuss the rules further.