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10-10-2012 Another Look at Simplified Per Diem Rates

With fewer receipts needed and additional expenses to deduct, employers may want to take a second look at using the simplified per diem rates for employee business expenses incurred while away from home.

The IRS recently published its annual notice of the per diem ("per day") rates in Notice 2012-63, and although the Notice does not actually change the rates from the previous year, the notice is a good reminder of some of the benefits that can be associated with using these flat rates, especially in light of changed interpretations of "incidental expenses."

Using the federal per diem rate methods, employers may elect to pay a per diem rate to an employee for business expenses incurred away from home, such as lodging, meal, and incidental costs. Employees do not need to provide receipts or other evidence of the expenses, but need only to provide the time, place, and business purpose of the expenses. The rate to use is the lesser of the employer's rate or the federal maximum per diem rate. This simplified process lessens the burden on both employees and employers for expense reimbursements.

Additionally, last year the General Services Administration ("GSA") determined that "incidental expenses" only included fees and tips given to porters, baggage carriers, hotel staff, and the like, and did not include: (1) transportation expenses between places of lodging or business and places where meals are taken, and (2) mailing expenses of filling travel vouchers and paying employer-sponsored charge card billings. Therefore, taxpayers using per diem rates may separately deduct or be reimbursed for these transportation and mailing expenses.

Employers may continue to use a high-low substantiation method for calculating a per diem allowance. Although the IRS announced in 2011 that it planned to discontinue this alternative method, it quickly changed its mind after comments from a number of taxpayers. Under Section 5 of Rev. Proc. 2011-47, if the employer uses the high-low substantiation method, a high rate applies to localities designated as high-cost localities and a low rate applies to every other locality in the continental United States. These rates apply as if they were the federal per diem rate for the locality. The per diem rates are $242 for high-cost locality and $163 for any other locality within the continental United States, and the per diem rates in lieu of the federal meal and incidental expenses rate are $65 for travel to any high-cost locality and $52 for all other localities within the continental United States. The list of high-cost localities has not changed from the previous year.

The published rates continue to be effective for expenses incurred away from home on or after October 1, 2012. However, for the last three months of the calendar year, employers must continue to use the same method as the previous nine months.

Fraser Stryker is a leader in tax and employee benefits law including cash and deferred compensation. Attorneys in the Firm's Taxation and Employee Benefits Practice Groups advise individuals, business entities, governments, and nonprofit/tax-exempt organizations on a wide variety of tax and employee benefits matters and transactions and compensation arrangements. Fraser Stryker works with employers to implement and maintain employee benefit plans that help attract and retain top talent. For more information on compensation, fringe benefits and reimbursement arrangements, please contact Nicole R. Konen or Emily Wischnowski.


This article is provided by Fraser Stryker for general informational purposes and is not intended to be and should not be construed as legal advice on any specific facts or circumstances.

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