Optional 'High-Low', 'Special' Travel Expense Per Diem Rates Issued for 2016-2017

Author: Rena Pirsos, XpertHR Legal Editor

October 3, 2016

The IRS has issued Notice 2016-58 listing the optional high-low federal per diem rates an employer may use to reimburse expenses incurred by employees who travel on business to locations within the Continental US (CONUS). An employer may use these rates instead of the standard per diem rates, which were issued in August by the General Services Administration (GSA). The optional rates are effective for business travel undertaken on or after October 1, 2016, through September 30, 2017.

Notice 2016-58 also includes the special federal meals and incidental expenses (M&IE) per diem rates that apply to the transportation industry and the incidental-expenses-only rate.

High-Low Rates

The 2016-2017 high rate for lodging and M&IE increases to $282 (from $272 in 2015-2016) for travel to any locality designated on the list that is a high-cost locality. The low rate has increased to $189 (from $185) for travel to any other locality within CONUS. The high rate for M&IE only is $68 (unchanged from 2015-2016), and the low rate is $57 (also unchanged) for any other locality within CONUS.

Notice 2016-58 also lists the high-cost localities that have a federal per diem rate of $236 or more for all of the calendar year, or the portion of the calendar year, as specified under the listed key city name. It also lists the locations that have been added as high-cost localities, and those for which the portion of the year in which they qualify as high-cost has changed. Two localities have been removed from the list of high-cost localities for 2016-2017.

An employer that prefers to use the high-low rates must comply with IRS Revenue Procedure (Rev. Proc.) 2011-47 (2011-42 I.R.B. 520). The Rev. Proc. provides the general rules for using the optional per diem rates to substantiate an employee's lodging, meal and incidental expenses, or meal and incidental expenses only.

Transportation Industry Rates

The special federal M&IE rates for the transportation industry are $63 (unchanged from 2015-2016) for any locality of travel within CONUS, and $68 (also unchanged) for any locality of travel outside the continental US (OCONUS). These rates provide a simplified method of recordkeeping for employers whose employees routinely travel overnight to many different locations during a single payroll period. An employer may only use these rates if the transportation directly involves moving people or goods by airplane, barge, bus, ship, train or truck for travel away from home on trips to localities with differing M&IE rates.

Transition Rule

If an employer applied the GSA rates to an employee's travel during the first nine months of 2016, it may not use the high-low substantiation method for that employee until January 1, 2017.

On the other hand, if an employer applied the optional high-low rates for an employee for the first nine months of 2016, it must continue using that method for the rest of calendar year 2016 for that employee. An employer may continue to use the rates and high-cost localities in effect for the first nine months of 2016 for travel between October 1, 2016, and December 31, 2016, if the employer uses those rates consistently for this period for all employees it reimburses using this method.

Incidental Expenses

Instead of using actual expenses to compute the amount allowed as a deduction for incidental/ordinary and necessary business expenses paid or incurred for travel away from home, an employee may use an amount computed at the rate of $5 per day (unchanged) for each calendar day, or part of a day, he or she is away from home. This amount will be deemed substantiated, if the employee substantiates the time, place and business purpose of the travel for that day or part of a day.

Incidental expenses are defined by the GSA in its Federal Travel Regulations to include only fees and tips given to porters, baggage carriers, hotel staff and staff on ships. Transportation between places of lodging or business and places where meals are taken, and the mailing cost of filing travel vouchers and paying employer-sponsored charge card bills, are not included in incidental expenses. Thus, employers using per diem rates may separately deduct or reimburse transportation and mailing expenses.