IRS Addresses Deductibility of Employees' Business Travel Expenses in TCJA Guidance

Practical Law Legal Update w-023-0593 (Approx. 6 pages)

IRS Addresses Deductibility of Employees' Business Travel Expenses in TCJA Guidance

by Practical Law Employee Benefits & Executive Compensation

Background

As background, the Code permits a deduction for ordinary and necessary expenses paid or incurred in carrying out an employer's business, including meals, lodging, and related expenses that an employee incurs while traveling for business (26 U.S.C. § 162(a)). Expenses for travel away from home may be deducted if properly substantiated, and some employer reimbursement arrangements or per diem allowances are treated as the equivalent to substantiation. This assumes, however, that requirements are satisfied involving business connection, substantiation, and returning amounts that exceed expenses (26 U.S.C. § 274(d)). If so, the reimbursements are regarded as paid under an accountable plan and are not considered taxable income to the employee.

For more information, see:

If the employer's policy does not meet these requirements, amounts paid under the arrangement are considered wages and:

Must be included in the employee's gross income.
Must be reported as wages on the employee's Form W-2.
Are subject to withholding and payment of employment taxes (including under the Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA)) and income tax.

(26 C.F.R. § 1.62-2(c)(4).)

The permitted food or beverage deduction cannot be more than 50% of the amount of the expense that otherwise would be allowable (26 U.S.C. § 274(k), (n)). Expenses for lodging and meals may be calculated on an actual cost or per diem basis using methods and amounts specified by the IRS and the General Services Administration (GSA) (see Rev. Proc. 2011-47 and IRS Notice 2017-54).

In 2017, however, the TCJA:

Suspended miscellaneous itemized deductions, effective from 2018 until 2026 (26 U.S.C. § 67).
Eliminated the deduction for any item regarding an activity that is considered to be entertainment, amusement, or recreation (26 U.S.C. § 274(a)(1)).

(See Practice Note, Fringe Benefits Under Code Section 132: Transportation and Other Benefits: Suspension of Miscellaneous Itemized Deductions.)

However, otherwise allowable meal expenses remain deductible, subject to the 50% limit.

Revenue Procedure Addresses Substantiation Procedures and Related Issues

Revenue Procedure 2019-48 modifies and supersedes prior guidance by:

Removing references to provisions that were eliminated or suspended by the TCJA.
Setting out rules for using per diem rates to substantiate employees' expenses.

Per Diem Substantiation Method

The revenue procedure contains two methods (including a per diem method) for use in substantiating employees' expenses. The per diem method permits employers to pay a per diem allowance instead of reimbursing actual lodging, meal, and incidental expenses that are expected to be incurred by an employee for travel away from home. Under the per diem method, regarding lodging, meals, and incidental expenses, the amount deemed substantiated per day is the lesser of:

The daily per diem allowance.
The amount calculated using the federal per diem rate for the relevant locality.

If the employer only reimburses meals and incidental expenses, the amount deemed substantiated is the lesser of:

The daily per diem allowance.
The amount calculated using the federal meal and incidental expenses rates for the relevant locality.

Special rules apply to the transportation industry.

The revenue procedure also sets out transition rules for expenses paid or incurred in the last three months of the year.

High-Low Substantiation Method

Alternatively, the revenue procedure includes a high-low method for substantiating expenses. There are two rates under this method: one for high-cost and one for low-cost localities. The rates and list of localities are included in a notice that is published annually by the IRS. Under the high-low substantiation method, the amount deemed substantiated is the lesser of:

The daily per diem allowance.
The amount calculated using the high or low rate.

This method is not available to self-employed individuals and employees identified in the Code for purposes of substantiating meal and incidental expenses.

The revenue procedure also sets out transition rules for expenses paid or incurred in the last three months of the year.

Deductibility of Food and Beverage Expenses; Rules to Prevent Double-Dipping

The revenue procedure also includes detailed rules addressing how the two substantiation methods interact with the Code's limits on the deductibility of food and beverage expenses.

In another section, the revenue procedure addresses an arrangement in which:

The employer uses the per diem allowance instead of reimbursing actual lodging, meal, and incidental expenses (or meal and incidental expenses only).
The amount is treated as paid under an accountable plan.

In this situation, any additional payment for these expenses is:

Treated as paid under a nonaccountable plan.
Included in an employee's gross income.
Reported as wages or other compensation on the employee's Form W-2.
Subject to withholding and payment of employment taxes.

For more information on the accountable and nonaccountable plan rules under the Code and its implementing regulations, see Practice Note, Reimbursing Employee Expenses (Federal Taxation).

Withholding and Employment Taxes

The revenue procedure also addresses employers' obligations concerning withholding and employment taxes. Specifically, the guidance provides that the following amounts are subject to withholding and payment of employment taxes:

Amounts paid in excess of substantiated amounts.
All amounts paid under a policy if there is evidence of abuse.
Amounts that are paid regardless of whether the employee incurs the expenses.

(The IRS views the situation addressed in the third bulleted item as circumventing the TCJA's suspension of miscellaneous itemized deductions.)

The revenue procedure provides guidance on when amounts that are considered wages are subject to withholding and payment of employment taxes.

Effective Date

Revenue Procedure 2019-48 is effective for covered per diem allowances that are paid and travel that occurs on or after November 26, 2019. (Note, however, that the TCJA changes underlying the revenue procedure became effective beginning in 2018 and ending in 2025.)

Practical Impact

Revenue Procedure 2019-48 continues the IRS's rollout of formal (and informal) guidance addressing the TCJA. In another recent pronouncement, Revenue Procedure 2019-46, the IRS officially modified pre-TCJA guidance to provide (among other things) that:

Individuals may not use the business standard mileage rate to claim a miscellaneous itemized deduction during the TCJA suspension period.
The deduction for moving expenses during the TCJA suspension period does not apply except for certain members of the US Armed Forces.

(See Practice Note, Fringe Benefits: Moving Expenses: TCJA Suspension of Moving Expenses Deduction and Exclusion; IRS Implementing Guidance.)

IRS Addresses Deductibility of Employees' Business Travel Expenses in TCJA Guidance | Practical Law