IRS Issues Optional "High-Low" and Special Per Diem Rates for 2014-2015

Author: Alice Gilman

Date: September 29, 2014

The IRS has issued Notice 2014-57 announcing the annual list of "optional high-low" federal per diem rates that employers may choose to use instead of the standard federal rates issued by the General Services Administration (GSA) to reimburse expenses incurred by employees who travel on business to locations within the Continental US (CONUS). The rates are effective for travel on or after October 1, 2014.

The IRS also has issued the special federal meals and incidental expenses (M&IE) per diem rates that apply to the transportation industry and the incidental-expenses-only rate.

Employers should note that IRS Revenue Procedure (Rev. Proc.) 2011-47 provides the general rules for using the optional per diem rates instead of the GSA standard rates to substantiate an employee's lodging, meal and incidental expenses, or meal and incidental expenses only. Employers that use the IRS's "optional high-low" localities method must comply with Rev. Proc. 2011-47.

High-Low Rates

The 2014-2015 "high" rate for lodging and M&IE has increased to $259 (from $251 in 2013-2014) for travel to any locality designated on the list as high-cost. The "low" rate has increased to $172 (from $170) for travel to any other locality within CONUS. The high rate for M&IE only is $65 (unchanged from 2013-2014) and the low rate is $52 (unchanged) for any other locality within CONUS.

IRS Notice 2014-57 also lists the high-cost localities that have a federal per diem rate of $216 or more for all of the calendar year, or the portion of the calendar year specified under the key city name. It also lists the locations that have been added or removed as high-cost localities, and those for which the portion of the year in which they qualify as high-cost has changed.

Transportation Industry Rates

The special federal M&IE rates for the transportation industry are $59 (unchanged from 2013-2014) for any locality of travel within CONUS, and $65 (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 2014, it may not use the high-low substantiation method for that employee until January 1, 2015.

On the other hand, if an employer applied the high-low rates for an employee for the first nine months of 2014, it must continue using that method for the rest of calendar year 2014 for that employee. An employer may continue to use the rates and high-cost localities in effect for the first nine months of 2014 for travel between October 1, 2014 and December 31, 2014, if the employer uses those rates consistently for this period for all employees it reimbursed 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 from 2013-2014) 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 in the Federal Travel Regulation 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.