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Simplified Business Per Diem Rates for Travel
Rev Proc 2006-41, 2006-43 IRB
| Many companies use per-diem rates to reimburse their
employees for business travel expenses rather than requiring
employees to submit receipts for their expenditure. The IRS
recently increased the simplified per-diem rate (high-low
per-diem rate) for post September 30, 2006 business travel
expenses. Employers may begin using the new rates immediately or
wait until January 1, 2007 to implement them. |
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Per-Diem Reimbursement Method:
Regular actual per-diem method:
An employer may pay a per-diem amount to an employee for
business-travel expense reimbursement. If the rate paid doesn’t
exceed IRS-approved maximums, and employee provides simplified
substantiation (time, place and business purpose), the
reimbursement is treated as made under an accountable plan,
which is not subject to income or payroll tax withholding.
IRS-approved per-diem maximum is the GSA (General Services
Administration) per-diem rate paid by the federal government to
its workers on travel status. It usually contains two
components: one for lodging expense and the other for meals and
incidental expenses (M&IE) such as laundry and pressing of
clothing, tips for services, mailing cost, etc. These rates
effective October 1, 2006 for federal are available on the
website at http://www.gsa.gov.
High-low per-diem method:
As an alternative, an employer may use a simplified high-low
per-diem method, under which there is one uniform per-diem rate
for all high-cost areas within CONUS (Continental U.S.) and
another rate for all other areas within CONUS.
Compared to previous rate applying to travel on or after
October 1, 2005, simplified high-low per-diem has been boosted
for post September 30, 2006 business travel by $20 and $7 for
high-cost areas and non-high-cost localities respectively.
Specifically, the high-cost-area per-diem is $246, consisting of
$188 for lodging and $58 for M&IE. That for all other localities
is $148, consisting of $103 for lodging and $45 for M&IE.
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Rate effective October 1,
2006 |
Rate effective October 1,
2005 |
| High-Cost Area |
Non-High-Cost Area |
High-Cost Area |
Non-High-Cost Area |
| Lodging rate ($) |
188 |
103 |
168 |
96 |
| M&IE rate ($) |
58 |
45 |
58 |
45 |
| Combined per-diem ($) |
246 |
148 |
226 |
141 |
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In the meantime, high-cost and non-high-cost localities
are periodically updated by the IRS. This time, five
localities - Santa Barbara, CA; South Lake Tahoe, CA;
Fort Lauderdale, FL; Fort Walton Beach/DeFuniak Springs,
FL; and Stuart, FL - are added to the list of high-cost
areas, while a number are dropped from that list, such
as Napa, CA; Bar Harbor, ME; and Conway, NH. Besides,
modifications are made for the date of
seasonal-attraction localities to qualify as high-cost
area, and the definition of certain localities. What's
more, transition rules are worth noticing here. On the
one hand, a taxpayer using actual per-diem method for
the first nine months of 2006 cannot use the high-low
per-diem method until January 1, 2007. On the other
hand, a taxpayer, using high-low per-diem method for the
first nine months of 2006, must continue using such
method. However, in terms of per-diem rate, he/she may
have two choices:
(i) he/she may immediately use new per-diem rate
effective October 1, 2006,
(ii) he/she may continue using old per-diem rate for the
rest of 2006 and begin to use new rate from January 1,
2007.
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| Transition Rule for Per-Diem Application |
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Per-Diem Method |
Per-Diem Rate |
| Choice I |
Choice II |
| Actual Per-Diem |
Must use actual per-diem method for the rest
of 2006 |
Immediately use GSA rates effective October
1, 2006 |
Use old per-diem rates for the rest of 2006,
if those rates are used for the last three
months of 2006 |
| High-Low Per-Diem |
Must use high-low per-diem method for the
rest of 2006 |
Immediately use new per-diem rates effective
October 1, 2006 |
Use old per-diem rates for the rest of 2006 |
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Other optional methods for per-diem |
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Tax Treatment of Employee’s Meal Expense on
Different Reimbursement Plan: |
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Employer's tax deduction |
Employee's tax deduction |
| Accountable plan |
Employer gets deduction for expense in
corporate tax return, but the expense is subject
to the 50% limitation on meals. |
No 50% rule for meals applies. That is, all
meals expense reimbursed is deductible, but such
expenses should be includable in employee’s
gross income. |
| Nonaccountable plan |
Full of meals expense reimbursed to employee
is deductible as reasonable business or trade
expense. |
Not only does 50% limitation on meals apply,
but also all reimbursed meal expense is
considered miscellaneous itemized deduction,
subject to 2% of AGI limitation. |
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In this regard, in a high-cost area, the employer
with an accountable plan takes a per-diem deduction of
$217 ($188+$29), while the employer’s deduction for
non-high-cost-area per-diem only amounts to $125.50
($103+$22.5). However, no 50% limitation applies to the
incidental-expense-only per-diem. With special per-diem
rule applied to transportation industry, the employer
may deduct 75% of the per-diem meals accordingly, and
from 2008 on, the percentage will increase to 80%.
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| Self-employed Individuals: |
| Self-employed individuals may not choose allowable
federal per-diem rate above mentioned, however, both
M&IE-only per-diem and incidental-expense-only per diem
work for them |
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