IRS Updates Per Diem Substantiation Methods for TCJA Changes

(Parker Tax Publishing December 2019)

The IRS issued a revenue procedure updating the rules for using a per diem rate to substantiate the amount of an employee's expenses for lodging, meal, and incidental expenses, or for meal and incidental expenses only, that a payor (an employer, its agent, or a third party) reimburses. The revenue procedure modifies Rev. Proc. 2011-47 to incorporate changes made by the Tax Cuts and Jobs Act of 2017 and provides rules for using a per diem rate to substantiate, under Code Sec. 274(d) and Reg. Sec. 1.274-5, the amount of ordinary and necessary business expenses paid or incurred while traveling away from home. Rev. Proc. 2019-48.

Background

The Tax Cuts and Jobs Act of 2017 (TCJA) amended Code Sec. 67 to suspend all miscellaneous itemized deductions for tax years beginning after December 31, 2017, and before January 1, 2026. In addition, the TCJA amended Code Sec. 274 to generally disallow a deduction for expenses with respect to entertainment, amusement, or recreation for amounts incurred or paid after December 31, 2017.

Rev. Proc. 2011-47 contains the rules for using a per diem rate to substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home. It provides rules for using a per diem rate to substantiate an employee's expenses for lodging, meal, and incidental expenses, or for meal and incidental expenses only, that a payor (an employer, its agent, or a third party) reimburses. Employees and self-employed individuals that deduct unreimbursed expenses for travel away from home may use a per diem rate for meals and incidental expenses, or incidental expenses only, under Rev. Proc. 2011-47. Rev. Proc. 2011-47 does not provide rules for using a per diem rate to substantiate the amount of lodging expenses only.

IRS Revises Per Diem Rate Rules

Last week, the IRS issued Rev. Proc. 2019-48, which modifies and supersedes Rev. Proc. 2011-47. In Rev. Proc. 2019-48, the IRS incorporates the changes made by the TCJA, and provides rules for using a per diem rate to substantiate the amount of an employee's expenses for lodging, meal, and incidental expenses, or for meal and incidental expenses only, that a payor (an employer, its agent, or a third party) reimburses. Certain specified employees and self-employed individuals that deduct unreimbursed expenses for travel away from home may use a per diem rate for meals and incidental expenses, or incidental expenses only, under this revenue procedure. Rev. Proc. 2019-48 does not provide rules for using a per diem rate to substantiate the amount of lodging expenses only. Taxpayers are not required to use a method described in Rev. Proc. 2019-48. A taxpayer may instead substantiate actual allowable expenses if the taxpayer maintains adequate records or other sufficient evidence.

The IRS publishes an annual notice that provides the special per diem rates for purposes of substantiating amounts paid to employees in the transportation industry, qualified performing artists, fee-basis state or local government officials, eligible educators, and Armed Forces reservists. The annual notice also provides the list of high-cost localities for purposes of applying the high-low substantiation method in lieu of the per diem substantiation method. Notice 2019-55 provides the special per diem rates for 2019-2020.

Rev. Proc. 2019-48 modifies Rev. Proc. 2011-47 for the following:

(1) The definition of "incidental expenses" is updated to reflect the definition of this term in the current Federal Travel Regulations.

(2) Several sections are deleted to reflect the following changes made by the TCJA: (i) unreimbursed employee travel expenses that are miscellaneous itemized deductions subject to the 2-percent of adjusted gross income floor are not permitted during the suspension period, and (ii) a deduction for expenses with respect to entertainment, amusement, or recreation is generally disallowed.

(3) New sections are added to clarify that employees described in Code Sec. 62(a)(2)(B)-(E) (i.e., employees in the transportation industry, qualified performing artists, fee-basis state or local government officials, eligible educators, and Armed Forces reservists), may continue to use the meal and incidental expenses only deduction method and the incidental expenses only deduction method to substantiate their expenses.

For a discussion of the per diem methods of substantiating deductions, see Parker Tax ¶91,130.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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