The Internal Revenue Service issued the special per diem rates for travel expenses that became effective October 1, 2021, which taxpayers can use to substantiate the amount of ordinary and necessary business expenses incurred while traveling away from home.
The IRS allows employers to pay employees per diem rates, or daily allowances for travel expenses such as lodging, meals and incidental expenses. It is important to note that taxpayers in the transportation industry can use a special industry rate.
The High-Low Per Diem Method
A simplified alternative to tracking actual business travel expenses is to use the high-low per diem method. This method provides fixed travel per diems. The IRS determines per diem travel expenses rates, which vary per location.
What is per diem?
Per diem is an allowance paid to your employees for lodging, meals, and incidental expenses incurred when travelling. This allowance is in lieu of reimbursing employees for their actual travel cost.
What does per diem cover?
There is a per diem rate for combined lodging and meal costs, and a per diem rate for meal costs alone. An employer may use either per diem method for reimbursing employee travel expenses. A self-employed person can only use per diem for the meal costs.
Meals and Incidental Expenses
The meals and incidental expenses (M&IE) category covers all meals (breakfast, lunch, and dinner), room service, laundry, dry cleaning, pressing of clothing, and fees and tips for the people who provide services, such as food servers and luggage carriers.
The lodging category covers accommodations for overnight stays, such as hotels, motels, inns, resorts, and apartments.
New Rates for Per Diem Travel Expenses for 2021-2022
• The per diem rate for travel to any high-cost areas within the continental Unites States is $296., up from $292 last year. This consist of $222 for lodging and $74 for meals and incidental expenses. For all other areas within the continental United States, the per diem rate is $202, $138 for lodging and $64 for meals and incidental expenses.
• Incidental expense allowances remain unchanged at $5 per day for any location.
• The special meals and incidental expenses for taxpayers in the transportation industry are $69 for any locality of travel in the continental United States and $74 for any locality of travel outside the continental United States.
Conditions to consider for Deductible Travel Cost for Businesses
1) Travel Must Be for Business Purposes
Travel expenses must be mainly for business purposes. Trips for pleasure are never tax-deductible. If the travel expenses are in combination with the acquisition or start-up of a new business, these expenses are not tax-deductible. However, you can include these charges in your startup cost and deduct a portion of them while amortizing the rest over 180 months. Further, travel expenses for a spouse or dependent are not deductible unless the individual is also a company employee. In addition, the individual’s trip must be for a legitimate business reason.
2) Expenses Must Be Necessary
To claim a deduction for travel expenses incurred by your business, the expense must be helpful and appropriate. You cannot deduct travel expenditures if they are excessive or lavish, or that are for personal purposes.
3) The Expense Must Incur Away from Home
A business tax home is the entire city or general area where the main place of business or work is located. To deduct travel expenditures, you must be “away from home.
Simplified Recordkeeping Per Diem Travel Expenses for 2021-2022
If your company uses per diem travel expenses rates, your employees don’t have to meet the usual recordkeeping rules required by law. Collecting paper or electronic receipts for expenses generally isn’t required under the per diem method. Instead, the employer simply pays the specified allowance to employees. Nonetheless, employees must substantiate the time, place and business purpose of the travel. Per diem reimbursements generally aren’t subject to income or payroll tax withholding or reported on the employee’s Form W-2.
Businesses use per diem payments to provide reimbursement to employees who travel for business purposes. Per diem travel expenses rates vary by location and time of year and are classified as lodging and meals and incidental expenses (M&IE).
If your payments do not exceed the maximum federal per diem rate in effect, these expenses are deductible; but if per diem payments exceed federal limits, any excess will be taxed as ordinary income.