Travel Expenses - Document Them or Not?
July 18, 2011
Terry Peltz, Director
Performance Advisors LLC
IRS will discontinue the high-low method for substantiating travel expenses
The IRS has announced that it will discontinue the high-low method used by taxpayers in a trade or business to substantiate travel expenses incurred while away from home. The method, developed by the IRS, applies to travel expenses for meals, lodging and incidental expenses. It not only has provided a short-cut method for employers to cover the paperwork required to substantiate business travel deductions but in the past it has also helped the IRS streamline certain audits.
Under the high-low method, the IRS provides optional per diem allowances that employers and employees are deemed to have substantiated. The method can be used in lieu of substantiating actual travel-related expenses. The per diem amounts also satisfy the requirement that employees provide the employer with an adequate accounting of meal and lodging expenses.
The IRS publishes a list of localities classified as high-cost areas under the high-low method. All other localities in the continental United States (CONUS) are classified as low-cost areas. The maximum per diem rate for high-cost areas is $233 for travel on or after October 1, 2010. This represents $168 for lodging and $65 for meals and incidental expenses (M&IE). The per diem rate for low-cost areas on or after October 1, 2010, is $160, which represents $108 for lodging and $52 for M&IE.
The IRS requested comments in 2010 on whether to continue the method and received no comments. The IRS interpreted such lack of interest as the deciding reason to discontinue the method. It also reportedly has found the collection of data, as well as the politics that went into designating an area as “high cost,” growing more difficult when compared to the value of continuing the method in an environment in which digitized travel receipts are now so easily available. Taxpayers currently using the high-low method, however, can anticipate continuing to use it through 2011.
More IRS Guidance to Come
Later in 2011, the IRS promises to issue a new revenue procedure, without the high-low method, that will provide general rules and procedures for substantiating lodging, meals and incidental expenses incurred in business travel away from home. It is unlikely that the IRS will issue high-low rates for 2012.
Government employers use the per diem method widely, practitioners report. Private industry, however, generally prefers to reimburse employees based on actual receipts and, therefore, only a small percentage of private businesses will be expected to miss using the high-low method to substantiate travel expenses.
For questions on this or any other tax question, contact your trusted tax advisor, or visit www.irs.gov
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