IRS Issues Optional "High-Low," "Special" Per Diem Rates for 2017-2018

Author: Rena Pirsos, XpertHR Legal Editor

September 28, 2017

An employer that prefers to use per diem allowances to reimburse employees who travel on business in the Continental US (CONUS) may use the IRS's optional "high-low" rates, which may be more generous than the regular per diem rates. The high-low federal per diem rates that are effective for business travel undertaken on or after October 1, 2017, through September 30, 2018, were issued by the IRS this week in Notice 2017-54.

The Notice 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 2017-2018 high rate for lodging and M&IE is increased to $284 (from $282 in 2016-2017) for travel to any locality designated on the list that is a high-cost locality. The low rate is increased to $191 (from $189) for travel to any other locality within CONUS. The high rate for M&IE only is $68 and the low rate is $57 (both unchanged) for any other locality within CONUS.

Notice 2017-54 lists the high-cost localities that have a federal per diem rate of $238 or more (up from $236 or more) for the entire 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.

The IRS made the following changes to the list of high-low localities for 2017-2018:

  • Seven localities have been added to the list;
  • For 10 localities, the portion of the year in which they are considered high-cost localities has changed; and
  • Four localities have been removed from the list.

An employer that prefers to use the high-low rates must comply with IRS 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 remain unchanged at $63 for any locality of travel within CONUS and $68 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 in 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 2017, it may not use the high-low substantiation method for that employee until January 1, 2018.

On the other hand, if an employer applied the optional high-low rates for an employee for the first nine months of 2017, it must continue using that method for the rest of calendar year 2017 for that employee. An employer may continue to use the rates and high-cost localities in effect for the first nine months of 2017 for travel between October 1, 2017, and December 31, 2017, 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 in the GSA's 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.