The government sets a flat rate for certain “high-cost areas” such as New York, Chicago, Los Angeles, and other major cities each year.
Employee business travel expenses are frequently scrutinized by the IRS. Unfortunately, keeping all of the detailed records required by IRS regulations is a hassle. However, your company may be able to benefit from a recordkeeping shortcut.
You can, for example, rely on the “per diem rates” established for government employees. The IRS says your for-profit business can use the same rates as its employees, with one exception: a business owner-employee who owns 10% or more of the company cannot use the rates. However, all other employees are ready to go.
Each year, the rates are updated. The IRS recently published new rates for its fiscal year 2023 (FY2023), which runs from October 1, 2022, to September 30, 2023. (more on this later). So, if your company wants to use the new rates for travel late in the calendar year 2022, they are already in effect.
Background: Employer-paid reimbursements for business travel expenses, including the cost of meals and lodging, are tax-free for the employees and deductible by the employer if employees properly account for their costs. The issue is that employees must keep extensive records that are supported by documentation. Employees who receive a per diem allowance are not required to keep receipts for all of their travel expenses. The approved amount is simply paid by the employer.
Employees aren’t even required to disclose the payments on their tax returns, but they still need to provide documentation for the date, location, and business-related purpose of their travel.
The government establishes a flat rate for certain “high-cost areas” such as New York, Chicago, Los Angeles, and other major cities each year. Other areas, such as Vail, Colorado, and Nantucket, Massachusetts, are only considered high-cost areas on a seasonal basis. All other areas are classified as “low-cost areas.”
Rates generally fluctuate slightly from year to year. As a result, the per diem rate for high-cost areas has increased from $296 to $297 in FY2023. In all other areas (i.e., low-cost areas), the per diem rate is $204, up from $202 in 2022.
Additionally, as per usual, changes have been made to the list of high-cost areas. On the list of high-cost regions for FY2023, the following areas have been added: Gulf Shores, Alabama; Phoenix/Scottsdale, Arizona; San Luis Obispo, California; Durango and Steamboat Springs, Colorado; Bradenton, Cocoa Beach, Gulf Breeze, Panama City, Pensacola, Punta Gorda, Sarasota, Sebring, and Stuart, Florida; Myrtle Beach, South Carolina; Moab, Utah; Manchester, Vermont; Sun Valley/Ketchum, Idaho; Portland, Maine; Mackinac Island, Michigan; Toms River, New Jersey; Glens Falls, New York; Duluth, Minnesota; Kalispell/Whitefish, Montana; Kill Devil Hills, North Carolina; Lincoln City, Oregon; and Port Angeles/Port Townsend, Washington.
Crested Butte/Gunnison, Colorado, on the other hand, has been removed from the list of high-cost areas for FY2023.
The complete list of high-cost areas is available at www.irs.gov/pub/irs-drop/n-22-44.pdf. To determine whether this strategy is appropriate for your business, speak with your qualified tax advisors.
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