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Travel for Business ~ Lodging & Per Diem

Preface ~ Client Letter - What this idea is about  ~ Introduction ~ 

Dear Client: 

This page describes and offers instructions when you make business trips that require rest overnight and you must spend the evening at a hotel or motel.  Herein you will discover how to compute the deductible expenses and what documents the IRS will require you to keep.

  The Office of Chief Counsel advised that, although Rev. Proc. 98-64, 1998-52 I.R.B. 32, provides for the use of per diem rates to substantiate deductions for lodging, meals, and incidental expenses, or for meal expenses only, it does not provide a method whereby the federal lodging rate may be used to substantiate deductions for lodging expenses only. Taxpayers must substantiate unreimbursed lodging expenses in order to deduct them. Code Section 274.

Please bear with me for a few short but highly technical paragraphs, which are usually presented in the techinical sections of these pages.  There is a very serious reasoning for placing these statements outside the technical section.  The reasoning is    that the proper authority, the law and the regulations, is paramount to opening the door for substantiation by using methods other than the IRS requests for documents so typical to this type of deduction.  Logbooks and manual entries along with canceled checks and paid bills are always requested.  Therefore -- please look at the following to understand both why the IRS must accept and how your existing records may very well satisfy the substantiation standards.

Learning Objectives (What You Asked) ~ Your Questions: The following questions will be answered

1. What is "per diem"?
2. What documents are required to protect the deduction

This topic covers both the IRS generic viewpoint, which is usually strict adherence to the "Adequate Records" rule, and the "Other Sufficient Evidence" Rule - which is not well known or understood by most Revenue Agents.  The following IRS promulgation emphasizes the IRS must follow the "Other Sufficient Evidence" Rule:

Furthermore the same regulation makes a directive:

Thereby the law (USC 26 §274) reads as follows:

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Engagement Status Letter ~ WARNING!

You have not engaged Bob Parrish CPA PC, Bob Parrish CPA, pro1040, Consulting on line, any related parties, or the ISP to perform any services for you or offer you advice.  This entire site is for educational or informational purposes only.   The materials are not opinions, advise, legal advice on any matter and have not been tailored to specific jurisdictions, individuals, other entities, or circumstances.  You are not to use the forms, concepts, strategies, or knowledge without assistance from a professional.   You must update and validate this information yourself with your own research, experience and the advice of a competent professional adviser in your jurisdiction.  The author, the corporation, the ISP, Bob Parrish CPA, Bob Parrish CPA, P.C. or other parties related to those or this site do not guarantee or warrantee in any manner the suitability, usefulness, accuracy, timeliness, or results of any portions of this site, nor the links contained in this site which link to other areas.   At times, information is taken from other sources and is believed to be accurate, but no verification or confirmation is performed.  Furthermore, if any federal or state law invalidates a portion of this disclaimer, the other portions still apply.   In addition, any allegations or actions are restricted to arbitration only and must be arbitrated by the Better Business Bureau in Sarasota Florida.  Reading of these pages constitutes complete acceptance and agreement with all disclaimer provisions on all pages of this site. ....... Sunday, March 04, 2007 08:48 AM   

Bob Parrish CPA:

License Jurisdictions —

CPA: LA, FL, TX

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Summary

Related Information

1. A few closely related topics & pages From Bob Parrish CPA PC (left-click this to expand it):   

   1. pro1040 Home

   2. Email Bob Parrish CPA PC

   3. Travel Expenses

      • Automobile Mileage Logbook

      • Auto-Car Mileage Log - Daily

      • Charts:

        • Car Sample

        • Expense Deductions

        • How to Prove

        • Local Transportation

        • Records to keep

        • Sample Records

      • Travel Business with Personal

      • Travel Companions

      • Travel Deductions

      • Travel - Email and Fax Qualify as Evidence

      • Travel - Entertainment - Gifts

      • Travel Records

      • Lodging Business Trips - Per Diem Method

      • Travel Reimbursement Form

      • Travel Meals Lodging

      • Travel Temporary job 1

      • Travel Temp Assignment 2

      • Travel Temp Assignment 3

      • Weekly Travel Expense

      • Weekly Travel Expense on Excel(c)  

      • Weekly Travel & Reimbursement Form

      • Truckers - Pilots - Mariners - Etc.

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Plain English Explanation

Object Restated
Why or How It Works
Alternatives
Cost V. Benefit
Other
Reserved

Your Answers

This Topic OBJECTIVE is: What it does Explanation of this topic and how it may affect you (for how it may affect you also refer to : Financial Accounting: Bookkeeping & Financials ~ Compliance - What is required for protection, defense, etc. ~ Alerts & Dangers)

To start look at the following chart:

If one uses the per diem, then the amount column is automatically accepted by the IRS.  However one must "properly substantiate" the lodging.  "Properly Substantiate" is covered next.

Very Important for those in the transportation industry:

Truckers - Pilots - Mariners - Etc.

Trucking Industry

Properly Substantiate

This is a Private Letter Ruling responding to a request of a taxpayer dated February 8, 1999.  This document is assigned an identification of PLR 199917059.  This letter presents the IRS viewpoint regarding the use of the IRS Per Diem amount for lodging.  

Code Sec. 274  * Sec. 274 Issues: Disallowance of certain entertainment, etc.,    expense (allowable v. not allowable) -- Traveling.

 This is in response to your request for information regarding the use of per diem rates to substantiate travel expenses, particularly with regards to the use by independent contractors of the federal lodging rate to substantiate deductions. I hope you find this information helpful.

Please be aware that this Chief Counsel Advice is for your general information and is advisory only. It is not intended to be conclusive as to the tax consequences of this matter to any specific taxpayer.

 Section 274(d)(1) of the Internal Revenue Code provides, in part, that no deduction shall be allowed under section 162 for any traveling expense (including meals and lodging while away from home) unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer's own statement the amount of the expense, the time and place of the travel, and the business purpose of the expense. Section 274(d) further provides that regulations may prescribe that some or all of the substantiation requirements do not apply to an expense that does not exceed an amount prescribed by such regulations.

 Section 1.274-5T(c) of the Income Tax Regulations provides the rules of substantiation by adequate records. To meet the "adequate records" requirement, taxpayers must maintain a contemporaneous account book, diary, log, statement of expense, trip sheets, or certain similar record, and documentary evidence that, in combination, are sufficient to establish each element of a travel expenditure. Section 1.274-5T(c)(2)(iii)(A) provides that, in the case of expenditures for lodging while traveling away from home, taxpayers must provide documentary evidence, such as receipts, paid bills, or similar evidence sufficient to support the expenditure.

 Section 1.274(d)-1T(a), in part, grants the Commissioner the authority to prescribe rules relating to substantiating the amount of expenses reimbursed under reimbursement arrangements (including per diem allowances) for ordinary and necessary expenses paid or incurred while traveling away from home. For meals while traveling away from home, section 1.274-5T(j) grants the Commissioner the authority to establish a method under which a taxpayer may elect to use a specified amount in lieu of substantiating the actual cost of meals.

 Pursuant to these two separate sources of authority, the Internal Revenue Service provides a revenue procedure for the use of per diem rates to substantiate traveling expenses, most recently published as Rev. Proc. 98-64, 1998-52 I.R.B. 32. Sections 4.01 and 4.02 of the revenue procedure implement section 1.274(d)-1T(a) by allowing employers to treat as substantiated certain traveling expenses incurred by employees that are reimbursed under an accountable plan. Section 4.03 of the revenue procedure implements section 1.274-5T(j) by allowing employees and self-employed individuals to use the federal M&IE rate to substantiate meal expense deductions.

 However, the revenue procedure does not provide a method whereby the federal lodging rate may be used to substantiate deductions for lodging expenses. In fact, the regulations do not authorize the Service to provide such a substantiation method. Rather, as noted, section 1.274-5T(c)(2)(iii)(A) requires that taxpayers provide documentary evidence, such as receipts, paid bills, or similar evidence sufficient to support an expenditure for lodging while traveling away from home.

 Accordingly, if a taxpayer wishes to deduct unreimbursed lodging expenses, the taxpayer must substantiate the expenses as required under section 1.274-5T. The taxpayer may not treat the expenses as substantiated by relying on the federal lodging rate.

 If you need further assistance in this matter, please contact my office at (202) 622-4920.  (NOTE: this is the telephone number of the IRS personnel writing this PLR)

One is then left to prove the other items.

For the self-employed, the IRS will usually require a receipt from a motel or hotel.

Adequate evidence. Documentary evidence ordinarily will be considered adequate if it shows the amount, date, place, and essential character of the expense.

For example, a hotel receipt is enough to support expenses for business travel if it has all of the following information.

1. The name and location of the hotel.
2. The dates you stayed there.
3. Separate amounts for charges such as lodging, meals, and telephone calls.

A restaurant receipt is enough to prove an expense for a business meal if it has all of the following information.

1. The name and location of the restaurant.
2. The number of people served.
3. The date and amount of the expense.

Canceled check. A canceled check, together with a bill from the payee, ordinarily establishes the cost. However, a canceled check by itself does not prove a business expense without other evidence to show that it was for a business purpose.

Duplicate information. You do not have to record information in your account book or other record that duplicates information shown on a receipt as long as your records and receipts complement each other in an orderly manner.

You do not have to record amounts your employer pays directly for any ticket or other travel item. However, if you charge these items to your employer, through a credit card or otherwise, you must keep a record of the amounts you spend.

Timely-kept records. You should record the elements of an expense or of a business use at or near the time of the expense or use and support it with sufficient documentary evidence. A timely-kept record has more value than a statement prepared later when generally there is a lack of accurate recall.

You do not need to write down the elements of every expense on the day of the expense. If you maintain a log on a weekly basis which accounts for use during the week, the log is considered a timely-kept record.

If you give your employer, client, or customer an expense account statement, it can also be considered a timely-kept record. This is true if you copy it from your account book, diary, statement of expense, or similar record.

Proving business purpose. You must generally provide a written statement of the business purpose of an expense. However, the degree of proof varies according to the circumstances in each case. If the business purpose of an expense is clear from the surrounding circumstances, then you do not need to give a written explanation.

Confidential information. You do not need to put confidential information relating to an element of a deductible expense (such as the place, business purpose, or business relationship) in your account book, diary, or other record. However, you do have to record the information elsewhere at or near the time of the expense and have it available to fully prove that element of the expense.

Incomplete Records

If you do not have complete records to prove an element of an expense, then you must prove the element by:

1. Your own written or oral statement, containing specific information about the element, and
2. Other supporting evidence that is sufficient to establish the element.

Destroyed records. If you cannot produce a receipt because of reasons beyond your control, you can prove a deduction by reconstructing your records or expenses. Reasons beyond your control include fire, flood, and other casualty.

Travel - Email and Fax Qualify as Evidence

    Accountable Plans:  To be an accountable plan, your employer's reimbursement or allowance arrangement

must include all three of the following rules.

1) Your expenses must have a business connection — that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer.

2) You must adequately account to your employer for these expenses within a reasonable period of time.

3) You must return any excess reimbursement or allowance within a reasonable period of time.

Accountable plan; Accountable Plans

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Why or How it works - Both Sides of the Equation and Examples:

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Alternatives

Comparisons

Contrasts

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Cost v. Benefit Analysis ~ Its Value

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Other

Here are some other chart or examples that are related:

Automobile Mileage Logbook

Car Mileage Log - Daily

Weekly Travel & Reimbursement Form

Travel Expense Deductions

Travel Records to Keep

Weekly Travel & Entertainment Report

Trucker Expenses

worksheet 12 column

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Reserved

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Technical Analysis and Explanation

Commentary

   In most circumstances only the "Adequate Records" rules will be covered by a government auditor.  Therefore you should become familiar with the "Other Sufficient Evidence" rule -- which is covered in Internal REvenue Regulation §1.274-5T(c)(3) and in other related regulations, rulings and legislation.

Please read the related the related documents listed in various parts of this page.

Travel - Email and Fax Qualify as Evidence

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Law

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Regs

   Following is an excerpt from the Internal Revenue written Regulation §1.274-5T(c)(3) and following.  The section §1.274-5T(c)(2) defines "Adequate Records" and is covered by the IRS in the Letter Ruling shown in the Plain English Section of this page.  However, that letter does not very  well cover, also described in the Regulations and the Law, what to do if the records do not closely resemble the "Adequate Records" or if the taxpayer has lost  or misplaced some of the records.  Therefore the related Regulation is presented.

(3) SUBSTANTIATION BY OTHER SUFFICIENT EVIDENCE--

          (i) IN GENERAL. If a taxpayer fails to establish to the satisfaction of the district director that he has substantially complied with the "adequate records" requirements of paragraph           (c)(2) of this section with respect to an element of an expenditure or use, then, except as otherwise provided in this paragraph, the taxpayer must establish such element--

               (A) By his own statement, whether written or oral, containing specific information in detail as to such element; and

               (B) By other corrobative evidence sufficient to establish such element.

          If such element is the description of a gift, or the cost or amount, time, place, or date of an expenditure or use, the corrobative evidence shall be direct evidence, such as a           statement in writing or the oral testimony of persons entertained or other witnesses setting forth detailed information about such element, or the documentary evidence described in paragraph (c)(2) of this section. If such element is either the business relationship to the taxpayer of persons entertained, or the business purpose of an expenditure, the corrobative evidence may be circumstantial evidence.

          (ii) SAMPLING--

               (A) IN GENERAL. Except as provided in paragraph (c)(3)(ii)(B) of this section, a taxpayer may maintain an adequate record for portions of a taxable year and use that record to substantiate the business/investment use of listed property for all or a portion of the taxable year if the taxpayer can demonstrate by other evidence that the periods for which an adequate record is maintained are representative of the use for the taxable year or a portion thereof.

               (B) EXCEPTION FOR POOLED VEHICLES. The sampling method of paragraph (c)(3)(ii)(A) of this section may not be used to substantiate the business/investment use of an  automobile or other vehicle of an employer that is made available for use by more than one employee for all or a portion of a taxable year.

               (C) EXAMPLES. The following examples illustrate this paragraph (c)(3)(ii).

                    EXAMPLE 1. A, a sole proprietor and calendar year taxpayer, operates an interior decorating business out of her home. A uses an automobile for local business                     travel to visit the homes or offices of clients, to meet with suppliers and other subcontractors, and to pick up and deliver certain items to clients when feasible. There is no other business use of the automobile but A and other members of her family also use the automobile for personal purposes. A maintains adequate records for the first three months of 1986 that indicate that 75 percent of the use of the automobile was in A's business. Invoices from subcontractors and paid bills indicate that A's business continued at approximately the same rate for the remainder of 1986. If other circumstances do not change (e.g., A does not obtain a second car for exclusive use in her business), the determination that the business/investment use of the automobile for the                     taxable year is 75 percent is based on sufficient corroborative evidence.

                    EXAMPLE 2. The facts are the same as in example (1), except that A maintains adequate records during the first week of every month, which indicate that 75 percent of the use of the automobile is in A's business. The invoices from A's business indicate that A's business continued at the same rate during the subsequent weeks of each month so that A's weekly records are representative of each month's business use of the automobile. Thus, the determination that the business/investment use of the automobile for the taxable year is 75 percent is based on sufficient corroborative evidence.

                    EXAMPLE 3. B, a sole proprietor and calendar year taxpayer, is a salesman in a large metropolitan area for a company that manufactures household products.  For the first three weeks of each month, B uses his own automobile occasionally to travel within the metropolitan area on business. During these three weeks, B's use of the automobile for business purposes does not follow a consistent pattern from day to day or week to week. During the fourth week of each month, B delivers to his customers all the orders taken during the previous month. B's use of his automobile for business purposes, as substantiated by adequate records, is 70 percent of the total use during that fourth week. In this example, a determination based on the records maintained during that fourth week that the business/investment use of the automobile for the taxable year is 70 percent is not based on sufficient corroborative evidence because use during this week is not representative of use during other periods.

          (iii) SPECIAL RULES. See Section 1.274-6T for special rules for substantiation by sufficient corroborating evidence with respect to certain listed property.

     (4) SUBSTANTIATION IN EXCEPTIONAL CIRCUMSTANCES. If a taxpayer establishes that, by reason of the inherent nature of the situation--

          (i) He was unable to obtain evidence with respect to an element of the expenditure or use which conforms fully to the "adequate records" requirements of paragraph (c)(2) of this section,

          (ii) He is unable to obtain evidence with respect to such element which conforms fully to the "other sufficient evidence" requirements of paragraph (c)(3) of this section, and

          (iii) He has presented other evidence, with respect to such element, which possesses the highest degree of probative value possible under the circumstances, such other evidence shall be considered to satisfy the substantiation requirements of section 274(d) and this paragraph.

     (5) LOSS OF RECORDS DUE TO CIRCUMSTANCES BEYOND CONTROL OF THE TAXPAYER. Where the taxpayer establishes that the failure to produce adequate records is due to the loss of such records through  circumstances beyond the taxpayer's control, such as destruction by fire, flood, earthquake, or other casualty, the taxpayer shall have a right to substantiate a deduction by reasonable reconstruction of his expenditures or use.

     (6) SPECIAL RULES--

          (i) SEPARATE EXPENDITURE OR USE--

               (A) IN GENERAL. For the purposes of this section, each separate payment or use by the taxpayer shall ordinarily be considered to constitute a separate expenditure. However,

               concurrent or repetitious expenses or uses may be substantiated as a single item. To illustrate the above rules, where a taxpayer entertains a business guest at dinner and thereafter at the theater, the payment for dinner shall be considered to constitute one expenditure and the payment for the tickets for the theater shall be considered to constitute a separate expenditure. Similarly, if during a day of business travel a taxpayer makes separate payments for breakfast, lunch, and dinner, he shall be considered to have made three separate expenditures. However, if during entertainment at a cocktail lounge the taxpayer pays separately for each serving of refreshments, the total amount expended for the refreshments will be treated as a single expenditure. A tipmay be treated as a separate expenditure.

               (B) AGGREGATION OF EXPENDITURES. Except as otherwise provided in this section, the account book, diary, log, statement of expense, trip sheet, or similar record required by paragraph (c)(2)(ii) of this section shall be maintained with respect to each separate expenditure and not with respect to aggregate amounts for two or more expenditures. Thus, each expenditure for such items as lodging and air or rail travel shall be recorded as a separate item and not aggregated. However, at the option of the taxpayer, amounts expended for breakfast, lunch, or dinner, may be aggregated. A tip or gratuity which is related to an underlying expense may be aggregated with such expense. In addition, amounts expended in connection with the use of listed property during a taxable year, such as for gasoline or repairs for an automobile, may be aggregated. If these expenses are aggregated, the taxpayer must establish the date and amount, but need not prove the business purpose of each expenditure. Instead, the taxpayer may prorate the expenses based on the total business use of the listed property. For other provisions permitting recording of aggregate amounts in an account book, diary, log, statement of expense, trip sheet, or similar record, see paragraphs (b)(2)(i) and (b)(3) of this section (relating to incidental costs of travel and entertainment).

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Cases

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Revenue Procedures

This is Revenue Procedure 2000-9 superceding this topics former Revenue Procedure 98-64.  This is a technical explanation from the Internal Revenue Service of the Service’s position (not necessarily that of a court, or Congress, although the Service will usually make honest attempts to incorporate most of the other branch’s viewpoints in its opinions).  This explanation covers how the Internal Revenue Service believes taxpayers should treat lodging (along with meals and incidentals) under either the actual cost method or the per diem method.

Code Secs. 62, 162, 267, 274

<<FULL TEXT>>

26 CFR 601.105: Examination of returns and claims for refund, credit, or

abatement; determination of correct tax liability.

(Also Part I, sections 62, 162, 267, 274; 1.62-2, 1.162-17, 1.267(a)-1,

1.274-5T, 1.274(d)-1T)

REV. PROC. 2000-9

SECTION 1. PURPOSE

      This revenue procedure updates Rev. Proc. 98-64, 1998-52 I.R.B. 32, by providing rules under which the amount of ordinary and necessary business expenses of an employee for lodging, meal, and incidental expenses or for meal and incidental expenses incurred while traveling away from home will be deemed substantiated under section 1.274-5T of the temporary Income Tax Regulations when a payor (the employer, its agent, or a third party) provides a per diem allowance under a reimbursement or other expense allowance arrangement to pay for such expenses. This revenue procedure also provides an optional method for employees and self-employed individuals to use in computing the deductible costs of business meal and incidental expenses paid or incurred while traveling away from home. Use of a method described in this revenue procedure is not mandatory and a taxpayer may use actual allowable expenses if the taxpayer maintains adequate records or other sufficient evidence for proper substantiation.

This revenue procedure does not provide rules under which the amount of an

employee's lodging expenses will be deemed substantiated when a payor provides an allowance to pay for those expenses but not meal and incidental expenses.

SECTION 2. BACKGROUND AND CHANGES

      .01 Section 162(a) of the Internal Revenue Code allows a deduction for

all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Under that provision, an employee or self-employed individual may deduct expenses paid or incurred while traveling away from home in pursuit of a trade or business. However, under section 262, no portion of such travel expenses that is attributable to personal, living, or family expenses is deductible.

      .02 Section 274(n) generally limits the amount allowable as a deduction under section 162 for any expense for food, beverages, or entertainment to 50 percent of the amount of the expense that otherwise would be allowable as a deduction. In the case of any expenses for food or beverages consumed while away from home (within the meaning of section 162(a)(2)) by an individual during, or incident to, the period of duty subject to the hours of service limitations of the Department of Transportation, section 274(n)(3) gradually increases the deductible percentage to 80 percent for taxable years beginning in 2008. For taxable years beginning in 2000, the deductible percentage for these expenses is 60 percent.

      .03 Section 274(d) provides, in part, that no deduction shall be allowed under section 162 for any traveling expense (including meals and lodging while away from home) unless the taxpayer complies with certain substantiation requirements. The section further provides that regulations may prescribe that some or all of the substantiation requirements do not apply to an expense that does not exceed an amount prescribed by such regulations.

      .04 Section 1.274(d)-1T(a) of the regulations, in part, grants the Commissioner the authority to prescribe rules relating to reimbursement arrangements or per diem allowances for ordinary and necessary expenses paid or incurred while traveling away from home. Pursuant to this grant of authority, the Commissioner may prescribe rules under which such arrangements or allowances, if in accordance with reasonable business practice, will be regarded (1) as equivalent to substantiation, by adequate records or other sufficient evidence, of the amount of such travel expenses for purposes of section 1.274-5T(c), and (2) as satisfying the requirements of an adequate accounting to the employer of the amount of such travel expenses for purposes of section 1.274-5T(f).

      .05 For purposes of determining adjusted gross income, section62(a)(2)(A) allows an employee a deduction for expenses allowed by Part VI(section 161 and following), subchapter B, chapter 1 of the Code, paid orincurred by the employee in connection with the performance of services asan employee under a reimbursement or other expense allowance arrangementwith a payor.

      .06 Section 62(c) provides that an arrangement will not be treated as areimbursement or other expense allowance arrangement for purposes ofsection 62(a)(2)(A) if it--

      (1) does not require the employee to substantiate the expenses coveredby the arrangement to the payor, or

      (2) provides the employee with the right to retain any amount in excessof the substantiated expenses covered under the arrangement.

      Section 62(c) further provides that the substantiation requirementsdescribed therein shall not apply to any expense to the extent that, underthe grant of regulatory authority prescribed in section 274(d), theCommissioner has provided that substantiation is not required for suchexpense.

      .07 Under section 1.62-2(c)(1) a reimbursement or other expenseallowance arrangement satisfies the requirements of section 62(c) if itmeets the requirements of business connection, substantiation, andreturning amounts in excess of expenses as specified in the regulations.Section 1.62-2T(e)(2) specifically provides that substantiation of certainbusiness expenses in accordance with rules prescribed under the authorityof section 1.274(d)-1T(a) or 1.274-5T(j) will be treated as substantiationof the amount of such expenses for purposes of section 1.62-2. Undersection 1.622(f)(2), the Commissioner may prescribe rules under which anarrangement providing per diem allowances will be treated as satisfyingthe requirement of returning amounts in excess of expenses, even thoughthe arrangement does not require the employee to return the portion ofsuch an allowance that relates to days of travel substantiated and thatexceeds the amount of the employee's expenses deemed substantiatedpursuant to rules prescribed under section 274(d), provided the allowanceis reasonably calculated not to exceed the amount of the employee'sexpenses or anticipated expenses and the employee is required to returnany portion of such an allowance that relates to days of travel notsubstantiated.

      .08 Section 1.62-2(h)(2)(i)(B) provides that if a payor pays a per diemallowance that meets the requirements of section 1.62-2(c)(1), theportion, if any, of the allowance that relates to days of travelsubstantiated in accordance with section 1.62-2(e), that exceeds theamount of the employee's expenses deemed substantiated for such travelpursuant to rules prescribed under section 274(d) and section1.274(d)-1(a) or section 1.274-5T(j), and that the employee is notrequired to return, is subject to withholding and payment of employmenttaxes. See sections 31.3121(a)-3, 31.3231(e)-1(a)(5), 31.3306(b)-2, and31.3401(a)-4. Because the employee is not required to return this excessportion, the reasonable period of time provisions of section 1.62-2(g)(relating to the return of excess amounts) do not apply to this portion.

      .09 Under section 1.62-2(h)(2)(i)(B)(4), the Commissioner may, in hisor her discretion, prescribe special rules regarding the timing ofwithholding and payment of employment taxes on per diem allowances.

      .10 Section 1.274-5T(j) grants the Commissioner the authority toestablish a method under which a taxpayer may elect to use a specifiedamount for meals paid or incurred while traveling away from home in lieuof substantiating the actual cost of meals.

      .11 Section 5.04 of this revenue procedure contains revisions to thelist of high-cost localities and to the high-low rates for purposes ofsection 5.

SECTION 3. DEFINITIONS

      .01 PER DIEM ALLOWANCE. The term "per diem allowance" means a paymentunder a reimbursement or other expense allowance arrangement that meetsthe requirements specified in section 1.62-2(c)(1) and that is

      (1) paid with respect to ordinary and necessary business expensesincurred, or which the payor reasonably anticipates will be incurred, byan employee for lodging, meal, and incidental expenses or for meal andincidental expenses for travel away from home in connection with theperformance of services as an employee of the employer,

      (2) reasonably calculated not to exceed the amount of the expenses or

the anticipated expenses, and

      (3) paid at or below the applicable Federal per diem rate, a flat rateor stated schedule, or in accordance with any other Service-specified rateor schedule.

      .02 FEDERAL PER DIEM RATE.

      (1) GENERAL RULE. The Federal per diem rate is equal to the sum of theFederal lodging expense rate and the Federal meal and incidental expense(M&IE) rate for the locality of travel. Each of these rates for aparticular locality in the continental United States ("CONUS") is setforth in Appendix A of 41 C.F.R., Chapter 301, as amended. See 41 C.F.R.Part 3017 (1999), as amended, for specific rules regarding these Federalrates. Each of these rates is established by the Secretary of Defense fora particular nonforeign locality outside the continental United States("OCONUS") (including Alaska, Hawaii, Puerto Rico, the Northern MarianaIslands, and the possessions of the United States), and by the Secretaryof State for a particular foreign OCONUS locality. Each of these OCONUSrates is published in the Per Diem Supplement to the StandardizedRegulations (Government Civilians, Foreign Areas). See, e.g., MaximumTravel Per Diem Allowances for Foreign Areas, PD Supplement 427, issuedDecember 1, 1999.

      (2) LOCALITY OF TRAVEL. The term "locality of travel" means thelocality where an employee traveling away from home in connection with theperformance of services as an employee of the employer stops for sleep orrest.

      (3) INCIDENTAL EXPENSES. The term "incidental expenses" includes, butis not limited to, expenses for laundry, cleaning and pressing ofclothing, and fees and tips for services, such as for porters and baggagecarriers. The term "incidental expenses" does not include taxicab fares,lodging taxes, or the costs of telegrams or telephone calls.

      .03 FLAT RATE OR STATED SCHEDULE.

      (1) IN GENERAL. Except as provided in section 3.03(2) of this revenueprocedure, an allowance is paid at a flat rate or stated schedule if it isprovided on a uniform and objective basis with respect to the expensesdescribed in section 3.01 of this revenue procedure. Such allowance may bepaid with respect to the number of days away from home in connection withthe performance of services as an employee or on any other basis that isconsistently applied and in accordance with reasonable business practice.Thus, for example, an hourly payment to cover meal and incidental expensespaid to a pilot or flight attendant who is traveling away from home inconnection with the performance of services as an employee is an allowancepaid at a flat rate or stated schedule. Likewise, a payment based on thenumber of miles traveled (e.g., cents per mile) to cover meal andincidental expenses paid to an over-the-road truck driver who is travelingaway from home in connection with the performance of services as anemployee is an allowance paid at a flat rate or stated schedule.

      (2) LIMITATION. For purposes of this revenue procedure, an allowancethat is computed on a basis similar to that used in computing theemployee's wages or other compensation (e.g., the number of hours worked,miles traveled, or pieces produced) does not meet the business connectionrequirement of section 1.62-2(d), is not a per diem allowance, and is notpaid at a flat rate or stated schedule, unless, as of December 12, 1989,(a) the allowance was identified by the payor either by making a separatepayment or by specifically identifying the amount of the allowance, or (b)an allowance computed on that basis was commonly used in the industry inwhich the employee is employed. See section 1.62-2(d)(3)(ii).

SECTION 4. PER DIEM SUBSTANTIATION METHOD

      .01 PER DIEM ALLOWANCE. If a payor pays a per diem allowance in lieu ofreimbursing actual expenses for lodging, meal, and incidental expensesincurred or to be incurred by an employee for travel away from home, theamount of the expenses that is deemed substantiated for each calendar dayis equal to the lesser of the per diem allowance for such day or theamount computed at the Federal per diem rate for the locality of travelfor such day (or partial day, see section 6.04 of this revenue procedure).

      .02 MEALS ONLY PER DIEM ALLOWANCE. If a payor pays a per diem allowanceonly for meal and incidental expenses in lieu of reimbursing actualexpenses for meal and incidental expenses incurred or to be incurred by anemployee for travel away from home, the amount of the expenses that isdeemed substantiated for each calendar day is equal to the lesser of theper diem allowance for such day or the amount computed at the Federal M&IErate for the locality of travel for such day (or partial day, see section6.04 of this revenue procedure). A per diem allowance is treated as paidonly for meal and incidental expenses if (1) the payor pays the employeefor actual expenses for lodging based on receipts submitted to the payor,(2) the payor provides the lodging in kind, (3) the payor pays the actualexpenses for lodging directly to the provider of the lodging, (4) thepayor does not have a reasonable belief that lodging expenses were or willbe incurred by the employee, or (5) the allowance is computed on a basissimilar to that used in computing the employee's wages or othercompensation (e.g., the number of hours worked, miles traveled, or piecesproduced).

      .03 OPTIONAL METHOD FOR MEALS ONLY DEDUCTION. In lieu of using actualexpenses, employees and self-employed individuals, in computing the amountallowable as a deduction for ordinary and necessary meal and incidentalexpenses paid or incurred for travel away from home, may use an amountcomputed at the Federal M&IE rate for the locality of travel for eachcalendar day (or partial day, see section 6.04 of this revenue procedure)the employee or self-employed individual is away from home. Such amountwill be deemed substantiated for purposes of paragraphs (b)(2) (travelaway from home) and (c) of section 1.274-5T, provided the employee orself-employed individual substantiates the elements of time, place, andbusiness purpose of the travel expenses in accordance with thoseregulations.

      .04 SPECIAL RULES FOR TRANSPORTATION INDUSTRY.

      (1) IN GENERAL. This section 4.04 applies to (a) a payor that pays aper diem allowance only for meal and incidental expenses for travel awayfrom home as described in section 4.02 of this revenue procedure to anemployee in the transportation industry, or (b) an employee orself-employed individual in the transportation industry who computes theamount allowable as a deduction for meal and incidental expenses fortravel away from home in accordance with section 4.03 of this revenueprocedure.

      (2) RATES. A taxpayer described in section 4.04(1) of this revenueprocedure may treat $38 as the Federal M&IE rate for any locality oftravel in CONUS, and/or $42 as the Federal M&IE rate for any locality oftravel OCONUS. A payor that uses either (or both) of these special rateswith respect to an employee must use the special rate(s) for all amountssubject to section 4.02 of this revenue procedure paid to that employeefor travel away from home within CONUS and/or OCONUS, as the case may be,during the calendar year. Similarly, an employee or self-employedindividual that uses either (or both) of these special rates must use thespecial rate(s) for all amounts computed pursuant to section 4.03 of thisrevenue procedure for travel away from home within CONUS and/or OCONUS, asthe case may be, during the calendar year.

      (3) PERIODIC RULE. A payor described in section 4.04(1) of this revenueprocedure may compute the amount of the employee's expenses that is deemedsubstantiated under section 4.02 of this revenue procedure periodically(not less frequently than monthly), rather than daily, by comparing thetotal per diem allowance paid for the period to the sum of the amountscomputed at the Federal M&IE rate(s) for the localities of travel for thedays (or partial days, see section 6.04 of this revenue procedure) theemployee is away from home during the period. For example, assume anemployee in the transportation industry travels away from home withinCONUS on 17 days (including partial days, see section 6.04 of this revenueprocedure) during a calendar month and receives a per diem allowance onlyfor meal and incidental expenses from a payor that uses the special ruleunder section 4.04(2) of this revenue procedure. The amount deemedsubstantiated under section 4.02 of this revenue procedure is equal to thelesser of the total per diem allowance paid for the month or $646 (17 daysat $38 per day).

      (4) TRANSPORTATION INDUSTRY DEFINED. For purposes of this section 4.04of this revenue procedure, an employee or self-employed individual is "inthe transportation industry" only if the employee's or individual's work(a) is of the type that directly involves moving people or goods byairplane, barge, bus, ship, train, or truck, and (b) regularly requirestravel away from home which, during any single trip away from home,usually involves travel to localities with differing Federal M&IE rates.For purposes of the preceding sentence, a payor must determine that anemployee or a group of employees is "in the transportation industry" byusing a method that is consistently applied and in accordance withreasonable business practice.

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SECTION 5. HIGH-LOW SUBSTANTIATION METHOD

      .01 GENERAL RULE. If a payor pays a per diem allowance in lieu ofreimbursing actual expenses for lodging, meal, and incidental expensesincurred or to be incurred