New Business Travel Per Diem Rates Announced for 2023

Recordkeeping for reimbursing business travel expenses can be cumbersome. Instead of reimbursing employees for the actual costs they incur for out-of-town lodging, meals and incidentals, some employers opt to pay fixed travel per diems. These amounts are based on IRS-approved rates that vary by locality. Here’s what you’ll need to know to determine if this simplified approach is right for your business.

Lowdown on the High-Low Method

Under the “high-low method,” the IRS establishes an annual flat rate for certain areas with higher costs of living. All locations within the continental United States that aren’t listed as “high-cost” automatically fall into the low-cost category. The high-low method may be used in lieu of specific per diem rates for business destinations. Examples of high-cost areas include San Francisco, Boston and Washington, D.C. (See the chart below for a complete list by state.)

Under some circumstances — for example, if an employer provides lodging or pays the hotel directly — employees may receive a per diem reimbursement only for their meals and incidental expenses. There’s also a $5 incidental-expenses-only rate for employees who don’t pay or incur meal expenses for a calendar day (or partial day) of travel.

The following items aren’t considered incidental expenses:

• Transportation between places of lodging or business and places where meals are taken, and
• The mailing cost of filing travel vouchers and paying employer-sponsored charge card billings.

You should consider reimbursing employees separately for these expenses, and then deducting the amounts as ordinary business expenses.

No More Receipts

If your company uses per diem rates, employees don’t have to meet the usual recordkeeping rules required by law. Receipts of expenses generally aren’t required under the per diem method. Instead, your organization simply pays the specified allowance to employees.

But employees still must substantiate the time, place and business purpose of the travel. Per diem reimbursements generally aren’t subject to income or payroll tax withholding or reported on the employee’s Form W-2. It’s also important to note that per diem rates can’t be paid to individuals who own 10% or more of the business.

Updated Rates

The IRS recently updated the per diem rates for business travel for fiscal year 2023, which started on October 1, 2022. Under the high-low method, the per diem rate for all high-cost areas within the continental United States is $297 for post-September 30, 2022, travel ($223 for lodging and $74 for meals and incidental expenses). For all other areas within the continental United States, the per diem rate is $204 for post-September 30, 2022, travel ($140 for lodging and $64 for meals and incidental expenses). Compared to the prior simplified per diems, both the high-cost area per diem has increased $1, and the low-cost area per diem has increased $2.

The IRS also modified the list of high-cost areas for post-September 30 travel. The following locations have been added to the high-cost list:

• Gulf Shores, Ala.,
• Phoenix/Scottsdale, Ariz.,
• San Luis Obispo, Calif.,
• Durango, Colo.,
• Steamboat Springs, Colo.,
• Bradenton, Fla.,
• Cocoa Beach, Fla.,
• Gulf Breeze, Fla.,
• Panama City, Fla.,
• Pensacola, Fla.,
• Punta Gorda, Fla.,
• Sarasota, Fla.,
• Sebring, Fla.,
• Stuart, Fla.,
• Sun Valley/Ketchum, Idaho,
• Portland, Maine,
• Mackinac Island, Mich.,
• Duluth, Minn.,
• Kalispell/Whitefish, Mont.,
• Toms River, N.J.,
• Glens Falls, N.Y.,
• Kill Devil Hills, N.C.,
• Lincoln City, Ore.,
• Myrtle Beach, S.C.,
• Moab, Utah,
• Manchester, Vt., and
• Port Angeles/Port Townsend, Wash.

Crested Butte/Gunnison, Colo., has been removed from the previous list of high-cost localities. In addition, certain tourist-attraction areas only count as high-cost areas on a seasonal basis. Starting on October 1, the portion of the year in which the following locations are high-cost localities has changed:

• Sedona, Ariz.,
• Napa, Calif.,
• San Diego, Calif.,
• Silverthorne/Breckenridge, Colo.,
• Fort Lauderdale, Fla.,
• Fort Walton Beach/DeFuniak Springs, Fla.,
• Key West, Fla.,
• Bar Harbor/Rockport, Maine,
• Falmouth, Mass.,
• Martha’s Vineyard, Mass.,
• Nantucket, Mass.,
• Jamestown/Middleton/Newport, R.I.,
• Charleston, S.C.,
• Park City, Utah, and
• Jackson/Pinedale, Wyo.

Important: This method is subject to various rules and restrictions. For example, if you use the high-low method for an employee, you must continue to use it for all reimbursement of business travel expenses within the continental United States during the calendar year. Your company may use any permissible method to reimburse that employee for any travel outside the continental United States, however.

For travel during the last three months of a calendar year, you must continue to use the same method (per diem or high-low) for an employee as you used during the first nine months of the calendar year. Also, your organization may use either:

1. The rates and high-cost localities in effect for the first nine months of the calendar year, or
2. The updated rates and high-cost localities in effect for the last three months of the calendar year, as long as you use the same rates and localities consistently for all employees reimbursed under the high-low method.

CAA Temporarily Suspends Limits on Meals Deductions

In terms of deducting amounts reimbursed to employees on their company’s tax return, employers normally must treat meals and incidental expenses as a food and beverage expense that’s subject to the 50% deduction limit on meal expenses. For certain types of employees — such as air transport workers, interstate truckers and bus drivers — the percentage is 80% for food and beverage expenses related to a period of duty subject to the hours-of-service limits of the U.S. Department of Transportation.

Important: Under the Consolidated Appropriations Act (CAA), for 2021 and 2022 only, business meals provided by restaurants are 100% deductible. Starting on January 1, 2023, the previous limits on deducting business meals while traveling are scheduled to resume.

TCJA Suspends Deductions for Unreimbursed Travel Expenses

For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) suspended miscellaneous itemized deductions for individual taxpayers. These deductions include such items as tax preparation costs, investment expenses, union dues and unreimbursed employee business expenses. Under prior law, taxpayers could deduct miscellaneous itemized deductions on their personal tax returns to the extent that the total exceeded 2% of adjusted gross income.

So, unless your business has formal expense reimbursement policies and procedures in place, your employees won’t be able to deduct any business-related travel expenses on their personal returns. Instead, for 2018 through 2025, they’ll be forced to pay out-of-pocket for unreimbursed out-of-town lodging, meals and incidental expenses. If your company doesn’t have a formal expense reimbursement plan, it could be at a disadvantage when trying to attract and retain employees who travel regularly.

On the other hand, employer-reimbursed travel expenses aren’t taxable to the employee. And your organization can deduct reimbursed travel expenses as an ordinary business expense.

High-Cost Area List for 2023

State

Key City (Effective Dates*)

Alabama

Gulf Shores (June 1-July 31)

Arizona

Phoenix/Scottsdale (February 1-March 31)

Sedona

California

Los Angeles (October 1-October 31; January 1-September 30)

Mill Valley/San Rafael/Novato (October 1-October 31; June 1-September 30)

Monterey (June 1-August 31)

Napa

Oakland

San Diego (February 1-August 31)

San Francisco

San Luis Obispo (June 1-August 31)

San Mateo/Foster City/Belmont

Santa Barbara

Santa Monica

Sunnyvale/Palo Alto/San Jose

Colorado

Aspen (October 1-March 31; June 1-September 30)

Denver/Aurora (October 1-October 31; April 1-September 30)

Durango (June 1-September 30)

Grand Lake (December 1-March 31)

Silverthorne/Breckenridge (October 1-March 31; June 1-September 30)

Steamboat Springs (December 1-March 31)

Telluride

Vail

Delaware

Lewes (July 1-August 31)

District of Columbia

Washington, D.C.

Florida

Boca Raton/Delray Beach/Jupiter (December 1-April 30)

Bradenton (February 1-March 31)

Cocoa Beach (February 1-March 31)

Fort Lauderdale (October 1-April 30)

Fort Myers (February 1-March 31)

Fort Walton Beach/DeFuniak Springs (October 1-October 31; March 1-September 30)

Gulf Breeze (June 1-July 31)

Key West (October 1-September 30)

Miami (December 1-March 31)

Naples (December 1-April 30)

Panama City (June 1-July 31)

Pensacola (June 1-July 31)

Punta Gorda (February 1-March 31)

Sarasota (February 1-April 30)

Sebring (February 1-March 31)

Stuart (February 1-March 31)

Vero Beach (December 1-April 30)

Georgia
Jekyll Island/Brunswick (March 1-July 31)

Idaho
Sun Valley/Ketchum (December 1-March 31; June 1-September 30)

Illinois

Chicago (October 1-November 30; April 1-September 30)

Maine

Bar Harbor/Rockport (October 1-October 31; July 1-September 30)

Kennebunk/Kittery/Sanford (July 1-August 31)

Portland (July 1-August 31)

Maryland

Ocean City (July 1-August 31)

Massachusetts

Boston/Cambridge

Falmouth (May 1-August 31)

Hyannis (July 1-August 31)

Martha’s Vineyard

Nantucket

Michigan
Mackinac Island (July 1-August 31)

Petoskey (July 1-August 31)

Traverse City (July 1-August 31)

Minnesota
Duluth (October 1-October 31; June 1-September 30)

Montana
Big Sky/West Yellowstone/Gardiner (June 1-September 30)

Kalispell/Whitefish (June 1-August 31)

New Mexico
Carlsbad

New Jersey

Toms River (July 1-August 31)

New York

Glens Falls (July 1-August 31)

Lake Placid (July 1-August 31)

New York City (October 1-December 31; March 1-September 30)

North Carolina

Kills Devil Hills (April 1-September 30)

Oregon

Lincoln City (July 1-August 31)

Portland (October 1-October 31; June 1-September 30)

Seaside (July 1-August 31)

Pennsylvania

Hershey (June 1-August 31)

Philadelphia (October 1-November 30; March 1-June 30; September 1-September 30)

Rhode Island

Jamestown/Middletown/Newport (October 1-October 31; June 1-September 30)

South Carolina

Charleston

Hilton Head (June 1-August 31)

Myrtle Beach (June 1-August 31)

Tennessee

Nashville

Utah
Moab (October 1-October 31; March 1-September 30)

Park City

Virginia

Virginia Beach (June 1-August 31)

Wallops Island (July 1-August 31)

Vermont

Manchester

Washington

Port Angeles/Port Townsend (July 1-August 31)

Seattle

Vancouver (October 1-October 31; June 1-September 30)

Wyoming

Cody (June 1-September 30)

Jackson/Pinedale

* If no effective date is listed, the location is a high-cost area all year long.

– Source: IRS

For More Information

Don’t let expense reimbursements for business travel become a source of frustration for you or your employees. Contact your tax advisor for ideas to simplify the reimbursement process that will pass IRS scrutiny, while eliminating administrative red tape.

This article appeared in Walz Group’s October 5 , 2022 issue of The Bottom Line e-newsletter, produced by Checkpoint Marketing.