The IRS has announced it will discontinue the high-low method for substantiating travel expenses. The agency did not specify when the high-low method will be discontinued but indicated that additional guidance will be issued.
Brian Mullen, CPA, president-elect of the south-central chapter of the Pennsylvania Institute of Certified Public Accountants (PICPA) predicted that discontinuance of the high-low method will have little impact on many taxpayers. “Industry and private companies prefer to reimburse employees based on actual receipts.” Many private employers are not comfortable with the per diem method and expect employees to provide justifications for spending, he explained. Government employers, on the other hand, widely use the per diem method, Mullen noted.
Background
Travel expenses, such as fares, meals, lodging and incidental expenses, incurred while a taxpayer is away from his or her tax home on a trade or business are deductible if the expenses are not lavish or extravagant. In lieu of substantiating actual travel-related meal and lodging costs, the IRS provides optional per diem allowances, which employers and employees are deemed to have substantiated by adequate records or other sufficient evidence. The per diem amounts also satisfy the requirement that employees provide an adequate accounting to the employer of meal and lodging expense amounts.
High-low method
The IRS created the high-low substantiation method to simplify the recordkeeping and administrative burden associated with travel costs. Under the high-low method, the IRS publishes a list of localities classified as high-cost areas. All other localities in the continental U.S. (CONUS) are classified as low-cost areas.
For travel on or after October 1, 2010, the maximum per diem rate for high-cost areas is $233 (which represents $168 for lodging and $65 for meals and incidental expenses (M & IE)). The maximum per diem date for all other CONUS localities (low-cost areas) is $160 (which represents $108 for lodging and $52 for M & IE).
Discontinuance
In Rev. Proc. 2010-42, the IRS requested comments whether to continue the high-low method. The IRS reported that it received no comments.
As a result, the IRS intends to discontinue the high-low method. A new revenue procedure will be issued later in 2011 without the high-low method. The IRS explained that it will provide general rules and procedures for substantiating lodging, meal and incidental expenses incurred in traveling away from home.
The IRS added that the special transportation rate will be published in an annual notice. The special transportation rate applies to meal and incidental expenses for travel away from home for an employee in the transportation industry.