The IRS has released revised per diem rates, which took effect on Oct. 1, 2021, in Notice 2021-52. Taxpayers may use the updated per diem rates to substantiate the amount of accommodation, food, and incidental expenditures they incur when traveling away from home. Read on to learn more about the updated travel expenses and how they may affect your individual tax preparation.
What You Need to Know About Per Diem Travel Expenses
Notice 2021-52 includes the following:
- Special transportation industry rate
- The rates for the high-low substantiation technique, along with the list of high-cost areas
- The rate for the incidental-expenses-only deduction
For taxpayers in the transportation sector, the special meal and incidental cost rates are $69 for any location in the continental U.S. and $74 for any place outside the continental U.S. There is a $5 per day incidental-expenses-only deduction for any travel location inside or outside the continental U.S.
The per diem rates that replace the rates in the previous Notice 2020-71 for the high-low substantiation technique are $296 for travel to any high-cost locale and $202 for travel to other areas within the continental U.S.
The per diem rates are $74 for travel to any high-cost location and $64 for travel to any other location within the continental U.S, in place of the rates indicated in Notice 2020-71. A list of high-cost cities with a federal per diem charge of $249 or more is included in the notification.
The previous Rev. Proc. 2019-48 established the criteria for substantiating the costs for accommodation, food, and incidental expenses for travel away from home by utilizing per diem rates rather than real expenses. The federal per diem rates released yearly by the General Services Administration can be used by taxpayers who utilize per diem rates to verify travel expenditure amounts under Rev. Proc. 2019-48.
For certain high-cost areas, Rev. Proc. 2019-48 allows some taxpayers to utilize a special transportation industry rate or rates based on a high-low substantiation approach. In the annual notice, the IRS publishes the rates and the rate for the incidental expenses alone deduction.
The IRS pointed out that using a per diem substantiation method is not required, stating that, “A taxpayer may verify actual allowable expenses if the taxpayer maintains adequate records or other sufficient evidence for proper substantiation.”
Deductible Travel Costs for Businesses
Travel expenses are subject to a number of restrictions that you must strictly adhere to or risk an unpleasant surprise during an audit. Being familiar with IRS ground rules makes it easier to organize your business travel expenses and to integrate business with vacation wherever feasible.
Depending on the facts and circumstances, you may be eligible to deduct the following expenses:
- Cost of meals
- Charges for luggage
- Hotel expenditures
- Cost of running and maintaining an automobile, including parking fees, fuel, oil, repairs, tires, supplies, tolls, etc.
- Cost of operating and maintaining house-trailers
- Taxi fares or other local transportation costs between the airport or station and a hotel, from one customer to another, or from one place of business to another
- Tips incidental to the above-mentioned charges
- Costs of cleaning and washing
- Telephone or fax expenditures, computer rental fees, public stenographer fees
- Costs of transportation for sample and display items, as well as the cost of a sample room
Essential Conditions for Deductible Business Costs
Not all travel expenses may be deductible. Here are some conditions that must be met.
Travel Must Be for Business Purposes
To be deductible, your trip must be largely for business purposes. Trips for pleasure are never tax-deductible. Only if you are traveling away from home in the pursuit of an established business may you deduct travel expenditures.
Travel costs incurred in conjunction with the acquisition or start-up of a new business are not tax-deductible. You can, however, include these charges in your startup costs and choose to deduct a portion of them while amortizing the rest over 180 months.
If you travel with your spouse, you will almost always be unable to claim a deduction for your partner’s costs. Travel costs for a spouse or dependent may be deductible if the individual is also a company employee. Furthermore, the spouse’s trip must be for a legitimate business reason, and the costs must otherwise be deductible.
Expenses Must Be Necessary
To claim a deduction for travel expenses incurred by your business, you must be able to fulfill the basic business cost standards. You cannot deduct travel expenditures if they are excessive or lavish—the costs must be fair in light of the facts and circumstances.
The IRS, on the other hand, allows a lot of leeway in this area. Your costs will not be rejected just because you flew first class or dined four-star restaurants.
The Expense Must Incur Away from Home
To deduct travel expenditures, you must be “away from home.” It may seem self-evident, but you must be traveling to deduct travel costs. However, it is not as straightforward as it appears. If you fulfill the following two criteria, you are traveling away from home for this purpose:
- It is necessary to travel outside of the general region or neighborhood of your tax residence.
- Your journey is long enough or far enough away that you cannot fairly expect to complete it without stopping for sleep or rest. This does not imply that you must stay at the destination overnight; for example, you may have had an all-day meeting and required a few hours of sleep at a hotel before driving home.
Keep in mind that regardless of where your personal or family home is located, your tax home is generally the entire general region or vicinity of your primary place of business.
Specific Scenarios
- Multiple Business Locations: If you have a multi-location firm, you should evaluate the overall time you spend working in each location, the level of business activity in each location, and the proportional amount of money from each location to establish your “primary” location.
- Lack of a Regular Business Location: If you do not have a fixed address or a primary place of business, you may be classified as an itinerant. Your tax home is wherever you work; therefore, you will never be able to meet the away-from-home criterion.
- Temporary Assignment: When you work away from your primary place of business for a year or less, rather than permanently, your tax home remains the same—all of your “away from home” costs are deductible.
Tax Preparation with Windes
Stay compliant with 2021-22 IRS per diem travel expenses with Windes. Our experts can assist you with individual tax preparation, the deduction for travel expenses, business meal deduction, and more. Connect with us today to learn more about our services.