IRS DESCRIBES PROCEDURE FOR REIMBURSEMENT OF EMPLOYEE TRAVEL EXPENSES UNDER PER DIEM PLANS.

Rev. Proc. 89-67

SECTION 1. PURPOSE

This revenue procedure provides rules under which the amount of ordinary and necessary business expenses of an employee for lodging, meal, and/or 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.

SEC. 2. BACKGROUND

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, including traveling expenses while 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(d) of the 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 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.

03 Section 1.274-5T(g) of the temporary 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).

04 Section 1.274-5T(j) of the temporary regulations grants the Commissioner the authority to establish a method under which a taxpayer may elect to use a specified amount for meals paid or incurred while traveling away from home in lieu of substantiating the actual cost of meals.

05 For purposes of determining adjusted gross income, section 62(a)(2)(A) of the Code allows an employee a deduction for expenses allowed by Part VI (section 161 and following), subchapter B, chapter 1 of the Code, paid or incurred by the employee in connection with the performance of services as an employee under a reimbursement or other expense allowance arrangement with a payor.

06 Section 62(c) of the Code provides that an arrangement will not be treated as a reimbursement or other expense allowance arrangement for purposes of section 62(a)(2)(A) if --

(1) such arrangement does not require the employee to substantiate the expenses covered by the arrangement to the payor, or

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

Section 62(c) further provides that the substantiation requirements described therein shall not apply to any expense to the extent that, under the grant of regulatory authority prescribed in section 274(d), the Commissioner has provided that substantiation is not required for such expense.

07 Under section 1.62-2T(c)(1) of the temporary regulations, a reimbursement or other expense allowance arrangement satisfies the requirements of section 62(c) of the Code if it meets the requirements of business connection, substantiation, and returning amounts in excess of expenses as specified in the regulations. Section 1.62-2T(e)(2) specifically provides that substantiation of certain business expenses in accordance with rules prescribed under the authority of section 1.274-5T(g) or (j) will be treated as substantiation of the amount of such expenses for purposes of section 1.62-2T. Under section 1.62-2T(f)(2), the Commissioner may prescribe rules under which an arrangement providing per diem allowances will be treated as satisfying the requirement of returning amounts in excess of expenses, even though the arrangement does not require the employee to return the portion of such an allowance that exceeds the amount of the employee's expenses deemed substantiated pursuant to rules prescribed under section 274(d), provided the allowance is reasonably calculated not to exceed the amount of the employee's expenses or anticipated expenses and the employee is required to return any portion of such an allowance that relates to days of travel not substantiated.

SEC. 3. DEFINITIONS

01 PER DIEM ALLOWANCE. The term "per diem allowance" means a payment under a reimbursement or other expense allowance arrangement that meets the requirements specified in section 1.62-2T(c)(1) of the temporary regulations and that

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

(2) is reasonably calculated not to exceed the amount of the expenses or the anticipated expenses, and

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

02 FEDERAL PER DIEM RATE.

(1) GENERAL RULE. The Federal per diem rate is equal to the sum of the Federal lodging expense rate the Federal meal and incidental expense (M&IE) rate for the locality of travel. The Federal per diem rate, the Federal lodging expense rate, and the Federal M&IE rate for a locality in the continental United States ("CONUS") are set forth in Appendix A of 41 C.F.R., Chapter 301. See 41 C.F.R. Part 301-7 (1989) for specific rules regarding these Federal rates. The Federal per diem rates for nonforeign localities outside the continental United States ("OCONUS") (including Alaska, Hawaii, Puerto Rico, the Northern Mariana Islands, and the possessions of the United States) are established by the Secretary of Defense and listed in Civilian Personnel Per Diem Bulletins published periodically in the Federal Register. See, e.g., Civilian Personnel Per Diem Bulletin Number 149, 54 Fed. Reg. 27,199 (June 28, 1989). The Federal per diem rates for foreign OCONUS localities are established by the Secretary of State and published, together with the rates for nonforeign OCONUS localities, in the Per Diem Supplement to the Stadardized Regulations (Government Civilians, Foreign Areas). See, e.g., Maximum Travel Per Diem Allowances for Foreign Areas, PD Supplement 307, issued December 1, 1989.

(2) OUTSIDE CONUS. For OCONUS travel away from home, if a separately identified Federal lodging expense rate or Federal M&IE rate does not exist for the OCONUS locality of travel, 60 percent of the applicable Federal per diem rate for that locality of travel is treated as equivalent to the Federal lodging expense rate for that locality and 40 percent of the applicable Federal per diem rate for that locality of travel is treated as equivalent to the Federal M&IE rate for that locality. If a separately identified Federal lodging expense rate or Federal M&IE rate is adopted for an OCONUS locality of travel for which no such separately identified rate previously existed, that rate shall apply to all travel within such locality beginning 30 days after its publication.

(3) LOCALITY OF TRAVEL. The term "locality of travel" means the locality where an employee traveling away from home in connection with the performance of services as an employee stops for sleep or rest.

(4) INCIDENTAL EXPENSES. The term "incidental expenses" includes, but is not limited to, expenses for laundry, cleaning and pressing of clothing, and fees and tips for services, such as for waiters and baggage handlers. The term "incidental expenses" does not include taxicab fares or the costs of telegrams or telephone calls.

03 FLAT RATE OR STATED SCHEDULE. An allowance is paid at a flat rate or stated schedule if it is provided on a uniform and objective basis with respect to the expenses described in section 3.01 above. Such allowance may be paid with respect to the number of days away from home in connection with the performance of services as an employee or on any other basis that is consistently applied and in accordance with reasonable business practice. Thus, for example, an hourly payment to cover meal and incidental expenses paid to a pilot or flight attendant who is traveling away from home in connection with the performance of services as an employee is an allowance paid at a flat rate or stated schedule. Likewise, a payment based on the number of miles traveled (e.g., cents per mile) to cover meal and incidental expenses paid to an over-the-road truck driver who is traveling away from home in connection with the performance of services as an employee is an allowance paid at a flat rate or stated schedule.

SEC. 4. PER DIEM SUBSTANTIATION METHOD

01 PER DIEM ALLOWANCE. If a payor pays a per diem allowance in lieu of reimbursing actual expenses for lodging, meal, and incidental expenses incurred or to be incurred by an employee for travel away from home, the amount of the expenses that is deemed substantiated is equal to the lesser of the per diem allowance or the amount computed at the Federal per diem rate for the locality of travel for the period the employee is away from home.

02 MEALS ONLY PER DIEM ALLOWANCE. If a payor pays a per diem allowance only for meal and incidental expenses in lieu of reimbursing actual expenses for meal and incidental expenses incurred or to be incurred by an employee for travel away from home, the amount of the expenses that is deemed substantiated is equal to the lesser of the per diem allowance or the amount computed at the Federal M&IE rate for the locality of travel for the period the employee is away from home. A per diem allowance is treated as paid only for meal and incidental expenses if (1) the payor provides the lodging in-kind, (2) the payor pays the cost of the lodging directly to the provider of the lodging, or (3) the payor does not have a reasonable belief that lodging expenses were or will be incurred by the employee.

SEC. 5. HIGH-LOW SUBSTANTIATION METHOD

01 GENERAL RULE. If a payor pays a per diem allowance in lieu of reimbursing actual expenses for lodging, meal, and incidental expenses incurred or to be incurred by an employee for travel away from home and the payor uses the high-low substantiation method described in this section 5 for travel within CONUS, the amount of the expenses that is deemed substantiated is equal to the lesser of the per diem allowance or the amount computed at the rate set forth in section 5.02 above for the locality of travel for the period the employee is away from home. This high-low substantiation method may be used in lieu of the per diem substantiation method provided in section 4.01 above, but may not be used in lieu of the meals only substantiation method provided in section 4.02 above.

02 SPECIFIC HIGH-LOW RATES. The rate set forth in this section 5.02 is $122 for any "high-cost locality" specified in section 5.03 below, or $85 for any other locality within CONUS. Whichever rate applies, it is applied as if it were the Federal per diem rate for the locality of travel. For purposes of applying the high-low substantiation method, the Federal M&IE rate shall be treated as $34 for a high-cost locality and $26 for any other locality within CONUS, and the Federal lodging expense rate shall be treated as $88 for a high-cost locality and $59 for any other locality within CONUS.

03 HIGH-COST LOCALITIES. The following localities are high-cost localities:

    Key City                   County and other defined location

SEC. 6. LIMITATIONS

01 IN GENERAL. The Federal per diem rate, the Federal lodging expense rate, and the Federal M&IE rate described in section 3.02 above for the locality of travel will be applied in the same manner as applied under the Federal Travel Regulations, 41 C.F.R. Part 301-7 (1989), except as provided in sections 6.02 through 6.04 below.

02 FEDERAL PER DIEM OR LODGING EXPENSE RATE. A receipt for lodging expenses is not required in order to apply the Federal per diem rate or the Federal lodging expense rate for the locality of travel.

03 FEDERAL PER DIEM OR M&IE RATE. A reduction for meals provided in kind is not required in order to apply the Federal per diem rate or the Federal M&IE rate for the locality of travel.

04 PRORATION OF THE FEDERAL PER DIEM OR M&IE RATE. Pursuant to the Federal Travel Regulations, in determining the Federal per diem rate or the Federal M&IE rate for the locality of travel, the full applicable Federal M&IE rate is available for a full day of travel from 12:01 a.m. to 12:00 midnight. For purposes of determining the amount deemed substantiated under section 4.01, 4.02, or 5.01 above with respect to partial days of travel away from home, a payor may use either of the following methods to prorate the Federal per diem rate or the Federal M&IE rate:

(1) The payor may prorate such rate using the method prescribed by the Federal Travel Regulations under which one fourth of the applicable Federal M&IE rate is allowed for each 6-hour quarter of the day (i.e., midnight to 6 a.m., 6 a.m. to noon, noon to 6 p.m., and 6 p.m. to midnight) during any portion of which the employee is traveling away from home in connection with the performance of services as an employee; or

(2) The payor may prorate such rate using any method that is consistently applied and in accordance with reasonable business practice. For example, if an employee travels away from home from 9 a.m. one day to 5 p.m. the next day, a method of proration that results in an amount equal to 2 times the Federal M&IE rate will be treated as being in accordance with reasonable business practice (even though only 1-1/2 times the Federal M&IE rate would be allowed under the Federal Travel Regulations). Similarly, if an employee travels away from home from 7 p.m. one day to 9 p.m. the next day, a method of proration that results in an amount equal to 1-1/2 times the Federal M&IE rate will be treated as being in accordance with reasonable business practice (even though only 1-1/4 times the Federal M&IE rate would be allowed under the Federal Travel Regulations).

05 FEDERAL M&IE RATE TREATED AS ENTIRELY FOR MEALS. When a per diem allowance is paid for lodging, meal, and/or incidental expenses, the entire amount of the Federal M&IE rate (e.g., $26 or $34 per day for a full day of travel within CONUS depending on the locality of travel) is treated as an expense for food and beverages. The payor of such a per diem allowance is subject to the 80-percent limitation on meal and entertainment expenses provided in section 274(n) of the Code.

06 RELATED PARTIES. The provisions of this revenue procedure will not apply in any case in which a payor and an employee are related within the meaning of section 267(b) of the Code, but for this purpose the percentage of ownership interest referred to in section 267(b)(2) shall be 10 percent.

SEC. 7. APPLICATION

01 If the amount of an expense is deemed substantiated under the rules provided in section 4 or 5, and the employee actually substantiates to the payor the elements of time, place, and business purpose of the travel expenses in accordance with paragraphs (b)(2) (travel away from home) and (c) (other than subparagraph (2)(iii)(A) thereof) of section 1.274-5T of the temporary regulations, the employee is deemed to satisfy the adequate accounting requirements of section 1.274-5T(f) as well as the requirement to substantiate by adequate records or other sufficient evidence for purposes of section 1.274-5T(c).

02 An arrangement providing per diem allowances will be treated as satisfying the requirement of section 1.62-2T(f)(2) of the temporary regulations with respect to returning amounts in excess of expenses if the employee is required to return any portion of such an allowance that relates to days of travel not substantiated, even though the arrangement does not require the employee to return the portion of such an allowance that exceeds the amount of the employee's expenses deemed substantiated. For example, assume a payor provides an employee an advance per diem allowance for meal and incidental expenses of $200, based on an anticipated 5 days of business travel at $40 per day to a locality for which the Federal M&IE rate is $34, and the employee substantiates 3 full days of business travel. The requirement to return excess amounts will be treated as satisfied if the employee is required to return the portion of the allowance that is attributable to the 2 unsubstantiated days of travel ($80), even though the employee is not required to return the portion of the allowance ($18) that exceeds the amount of the employee's expenses deemed substantiated under section 4.02 above ($102) for the 3 substantiated days of travel. However, the $18 excess portion of the allowance is treated as paid under a nonaccountable plan as discussed below in section 7.04.

03 An employee is not required to include in gross income the portion of a per diem allowance received from a payor that is less than or equal to the amount computed at the applicable per diem rate specified in section 4 or 5 above for the period of travel away from home if the employee substantiates the business travel expenses covered by the per diem allowance in accordance with section 7.01 above. See section 1.274-5T(f)(2)(i) of the temporary regulations. In addition, such portion of the allowance is treated as paid under an accountable plan, is not required to be reported on the employee's Form W-2, and is exempt from the withholding and payment of employment taxes. See section 1.62-2T(c)(2) and (c)(4).

04 An employee is required to include in gross income only the portion of the per diem allowance received from a payor that exceeds the amount computed at the applicable per diem rate specified in section 4 or 5 above for the period of travel away from home if the employee substantiates the business travel expenses covered by the per diem allowance in accordance with section 7.01 above. See section 1.274-5T(f)(2)(ii) of the temporary regulations. In addition, the excess portion of the allowance is treated as paid under a nonaccountable plan, is required to be reported on the employee's Form W-2, and is subject to withholding and payment of employment taxes. See section 1.62-2T(c)(3)(ii) and (c)(5).

05 If the amount of the expenses that is deemed substantiated under the rules provided in section 4 or 5 above is less than the amount of the employee's business expenses for travel away from home, the employee may claim an itemized deduction for the amount by which the business travel expenses exceed the amount that is deemed substantiated, provided the employee substantiates all the business travel expenses, includes on Form 2106 Employee Business Expenses, the deemed substantiated portion of the per diem allowance received from the payor, and includes in gross income the portion (if any) of the per diem allowance received from the payor that exceeds the amount deemed substantiated. See section 1.274-5T(f)(2)(iii) of the temporary regulations. The itemized deduction is subject to the 80- percent limitation on meal and entertainment expenses provided in section 274(n) of the Code and the 2-percent floor on miscellaneous itemized deductions provided in section 67.

SEC. 8. EFFECT ON OTHER DOCUMENTS

01 Rev. Rul. 80-62, 1980-1 C.B. 63, as modified by Rev. Rul. 80-203, 1980-2 C.B. 101, Rev. Rul. 84-51, 1984-1 C.B. 90, Rev. Rul. 85- 155, 1985-2 C.B. 89, Rev. Rul. 87-93, 1987-2 C.B. 81, Rev. Rul. 88-92, 1988-2 C.B. 39, and Rev. Rul. 89-120, 1989-47 I.R.B. 5, which in part sets forth the deemed substantiation rules for business expenses for travel away from home, is hereby superseded for per diem allowances paid to an employee on or after January 1, 1990, with respect to lodging, meal, and incidental expenses paid or incurred for travel while away from home on or after January 1, 1990.

02 Rev. Rul. 84-164, 1984-2 C.B. 63, which sets forth special deemed substantiation rules for business meal and incidental expenses for travel away from home, is hereby superseded for per diem allowances for such expenses paid to an employee in taxable years of the employee beginning on or after January 1, 1989, with respect to meal and incidental expenses paid or incurred in taxable years beginning on or after January 1, 1989.

DRAFTING INFORMATION

The principal author of this revenue procedure is Beverly A. Baughman of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Ms. Baughman on (202) 566-5985 (not a toll-free call).