New Per Diem Rates Get Tricky Amid Tax Law Changes

The new per diem numbers are out, effective October 1, 2018. But, as with everything in the era of tax reform, things aren’t always as they seem. The new rates include those for the transportation industry; the rate for the incidental expenses; and the rates and list of high-cost localities for purposes of the high-low substantiation method (we’ll explain what that is below). But, anyone who travels for business, or reimburses employees for doing so, should pay close attention.

Per diem (a Latin phrase meaning “for each day”) rates are a fixed amount paid to employees to compensate for lodging, meals, and incidental expenses incurred when traveling on business. Per diem payments are not considered part of the employee’s wages for tax purposes so long as the payments are equal to or less than the federal per diem rate and the employee provides an expense report. If the employee doesn’t provide a complete expense report, the payments will be taxable to the employee. Similarly, any payments which are more than the per diem rate will also be taxable. Most employers and employees find that using the fixed amount, the per-diem rates, instead of actual expenses, makes the entire reimbursement process easier.

Here’s where things get funky: For the 2017 tax year, unreimbursed job expenses were deductible on Schedule A as miscellaneous deductions subject to the 2% floor. That means that they were deductible to the extent that they exceeded 2% of your adjusted gross income (AGI). So, if your AGI in 2017 was $50,000 and your job-related expenses totaled $3,000 for that year, you could have deducted $2,000 of those expenses (2% of $50,000 is $1,000, and expenses over that amount ($3,000 less $1,000) would have been deductible). The Tax Cuts and Jobs Act (TJCA), however, eliminated unreimbursed job expenses and miscellaneous itemized deductions subject to the 2% floor for the tax years 2018 through 2025. Those expenses include unreimbursed travel and mileage.

Here’s a quick run-down of changes to note:

  • The business standard mileage rate cannot be used to deduct unreimbursed employee travel expenses for 2018 through 2025 tax years. (Exceptions do exist for members of a reserve component of the Armed Forces, state or local government officials paid on a fee basis, and certain performing artists.)
  • Self-employed taxpayers can still deduct business-related expenses but can only use the per diem rates for meal costs. They’ll have to use exact numbers for everything else.
  • As of October 1, 2018, the special meals and incidental expenses (M&IE) per diem rates for taxpayers in the transportation industry has increased slightly to $66 for any locality of travel in the continental United States and $71 for any locality of travel outside the continental United States. The per diem rate for M&IE includes all meals, room service, laundry, dry cleaning, and pressing of clothing, and fees and tips for persons who provide services, like waitstaff.
  • The rate for incidental expenses only is $5 per day. Incidental expenses include fees and tips paid at lodging, including porters and hotel staff. It’s worth noting that transportation between where you sleep or work and where you eat, as well as the mailing cost of filing travel vouchers and paying employer-sponsored charge card billings, are no longer included in incidental expenses. You’ll now have to ask that your employer reimburse you for those things.

In addition, to accommodate the varying costs associated with traveling to different parts of the country, there are special rates for certain destinations. For purposes of the high-low substantiation method, the per diem rates are $287 for travel to any high-cost locality and $195 for travel to any other locality within the continental United States. The meals & incidental expenses only per diem for travel to those destinations is $70 for travel to a high-cost locality and $60 for travel to any other locality within the continental United States.

There are no real surprises as to which cities made the high-cost list (they’re the places we associate with a high cost of living), but some changes have been made this year. The full list can be found here, or you can enter the city name and/or zip code here for additional certainty.

Lots to be aware of here. As always, we highly recommend that you connect with your BGW representative to discuss the changes and devise a correct strategy. Per diem rates are a lot more confusing in the era of tax reform. We’ll help you sort it all out.

 

Comments

  1. Great Post about new tax law firms. Thanks for sharing.

  2. Karen spada says:

    So….if a federal intermittent employee (W2) is assigned to Chicago for 10 months and the IRS per xiem is 74 $. The gov only reimburses 36$ per day, can the employee deduct the differenve for 2018 taxes.?

    • Patti Baker says:

      Unfortunately, the answer is, “It depends”. If they are compensated as a government employee, in whole or in part, on a fee basis then they can deduct the difference on their 2018 taxes by using Schedule 1 on their 1040 and attach form 2106. They would be considered a fee basis employee if they are paid from amounts that are retained from fees they collect from the public. Based on the question, it sounds like they are strictly a W-2 employee, therefore they would not be able to claim a deduction for the expenses not reimbursed by the per diem. The TJCA eliminated the miscellaneous itemized deductions which allowed unreimbursed expenses by employees.

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