IRS clarifies per diem rates for business expenses

The Internal Revenue Service (IRS) recently announced changes to its per diem rates. Per diem rates apply to the reimbursements given to employees to cover traveling expenses like meals, lodges and incidentals during business trips.

It is important to stress the reimbursement component because the Tax Cuts and Jobs Act (TCJA) that went into effect last year essentially eliminated the ability to deduct unreimbursed job expenses.

How do employees make sure their business expenses are not subject to tax obligations?

A failure to follow the rules can trigger a federal tax audit. Taxpayers can reduce this risk by following the per diem guidelines. In addition to making sure the expenses noted above are reimbursed by the employer, it is also important to meet these two criteria:

  • The right amount. The IRS does not consider the funds income for tax payments if the payments are equal to or less then the per diem rate. Any payment above this rate is taxable.
  • The right paperwork. The employee must have an expense report to support the claim that the expenses were related to business travel. A failure to do so could leave the employee subject to tax obligations on the reimbursements.

The per diem rates vary depending on the location. The IRS considers areas like Washington D.C., New York City, Nashville and Denver as high-cost localities and allow for higher reimbursement rates. It is best to review the rates at the IRS website to have a better idea of the allowances available before making travel arrangements.  

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