2003 Per Diem and Mileage Rates Announced

Many companies use per diem rates to reimburse their employees for business travel expenses rather than requiring employees to submit receipts for their expenditures. The IRS recently adopted revised federal per diem rates for the period October 1, 2002 through September 30, 2003. Employers may begin using the new rates immediately or wait until January 1, 2003, to implement them.

The federal per diem rates (available on the Internet at http://www.policyworks.gov/perdiem) differ depending on the location of the business travel. Use of a per diem rate that is less than or equal to the published federal rates eliminates the need to keep receipts to prove the amount of the expenses to the IRS. However, the time, place, and business purpose of the trip still must be substantiated.

The federal per diem rates include two components, one for lodging expenses and another for meal and incidental expenses. The meal and incidental expense rate may be used when an employee does not incur lodging expenses or when an employer reimburses an employee’s actual lodging costs, provides lodging in kind, or pays for lodging expenses directly.

For travel before 2003, "incidental expenses" include expenses for laundry, cleaning, and pressing of clothing, as well as fees and tips for services. Cab fares, telephone calls, and lodging taxes are not included. For travel after December 31, 2002, the IRS has adopted the definition of incidental expenses contained in the federal travel regulations. Thus, incidental expenses include only:

• Fees and tips given to porters, baggage carriers, bellhops, hotel maids, stewards or stewardesses and others on ships, and hotel servants in foreign countries;



• Costs of transportation between places of lodging or business and places where meals are taken, if suitable meals cannot be obtained at the temporary duty site; and,



• Mailing costs associated with filing travel vouchers and payment of government sponsored charge card billings.

Note that there are special rules for employees of the transportation industry. The rules are designed to accommodate travel away from home by employees who move either people or goods by airplane, barge, bus, ship, train, or truck and who regularly travel to localities with differing federal meal and incidental expense rates.

For travel within the continental United States, a simplified per diem rate method is available. Unless a travel location is specifically designated by the IRS as a "high-cost locality," the employer can reimburse employees at a rate of $125 per day ($90 for lodging and $35 for meals and incidental expenses). For designated high-cost localities (such as Los Angeles and New York City), the rate is $204 ($159 for lodging and $45 for meals and incidental expenses). The IRS updates the list of high-cost localities periodically. If an employer wants to switch between using the basic federal per diem rates and the high-low rates for reimbursing an employee’s expenses, the change can’t be made until 2003.

When a per diem allowance is paid for lodging, meals, and incidental expenses at the federal rate, the amount equal to the meal and incidental expense component is treated as an expense for food and beverages. Generally, only 50% of this expense is deductible. If the rate paid is less than the applicable per diem rate, 40% of the allowance is treated as a meal expense subject to the deduction limitation.

Many employees, self-employeds, and other taxpayers use standard mileage rates to compute the deductible expenses paid for operating a passenger automobile for business, charitable, medical, or moving expense purposes. Under the standard mileage method, the deduction is equal to the number of miles driven times the applicable mileage rate. amount is determined by multiplying the number of miles driven for the particular purpose by the applicable rate. Following are the recently announced rates (cents per mile) for 2003, as compared to 2002: