rp-09-47.pdf

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# Part III

Administrative, Procedural, and Miscellaneous

26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement;
determination of correct tax liability.

(Also Part I, 62, 162, 267, 274; 1.62-2, 1.162-17, 1.267(a)-1, 1.274-5.)

Rev. Proc. 2009-47

## SECTION 1. PURPOSE

This revenue procedure updates Rev. Proc. 2008-59, 2008-41 I.R.B. 857, and
provides rules under which the amount of ordinary and necessary business expenses of
an employee for lodging, meal, and incidental expenses, or for meal and incidental
expenses, incurred while traveling away from home are deemed substantiated under
1.274-5 of the 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 the expenses. In addition, this revenue procedure
provides an optional method for employees and self-employed individuals who are not
reimbursed to use in computing the amounts paid or incurred for business meal and
incidental expenses, or for incidental expenses only if no meal expenses are paid or
incurred, while traveling away from home. Use of a method described in this revenue
procedure is not mandatory, and a taxpayer may use actual allowable expenses if the

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taxpayer maintains adequate records or other sufficient evidence for proper
substantiation. This revenue procedure does not provide rules under which the amount
of an employee's lodging expenses are deemed substantiated to a payor when a payor
provides an allowance to pay for lodging expenses but not meal and incidental
expenses.

SECTION 2. BACKGROUND AND CHANGES

.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. Under that provision, an employee or self-employed individual
may deduct expenses paid or incurred while traveling away from home in pursuit of a
trade or business. However, under 262, no portion of travel expenses attributable to
personal, living, or family expenses is deductible.

.02 Section 274(n) generally limits the amount allowable as a deduction under 162
for any expense for food, beverages, or entertainment to 50 percent of the amount of
the expense that otherwise would be allowable as a deduction. In the case of any
expenses for food or beverages consumed while away from home (within the meaning
of 162(a)(2)) by an individual during, or incident to, the period of duty subject to the
hours of service limitations of the Department of Transportation, 274(n)(3) provides
that, for taxable years beginning in 2009 or thereafter, the deductible percentage for
these expenses is 80 percent.

.03 Section 274(d) provides, in part, that no deduction is allowed under 162 for any
travel expense (including meals and lodging while away from home) unless a taxpayer

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complies with certain substantiation requirements. Section 274(d) 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 the regulations.

.04 Section 1.274-5(g), 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. Under this grant
of authority, the Commissioner may prescribe rules under which these arrangements or
allowances, if in accordance with reasonable business practice, are regarded (1) as
equivalent to substantiation, by adequate records or other sufficient evidence, of the
amount of travel expenses for purposes of 1.274-5(c), and (2) as satisfying the
requirements of an adequate accounting to the employer of the amount of travel
expenses for purposes of 1.274-5(f).

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

.06 Section 62(c) provides that an arrangement is not treated as a reimbursement or
other expense allowance arrangement for purposes of 62(a)(2)(A) if it --

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

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(2) 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 these substantiation requirements do not apply to
any expense to the extent that, under the grant of regulatory authority in 274(d), the
Commissioner provides that substantiation is not required for the expense.

.07 Under 1.62-2(c), a reimbursement or other expense allowance arrangement
satisfies the requirements of 62(c) if it meets the requirements of business
connection, substantiation, and returning amounts in excess of expenses as specified in
the regulations. If an arrangement meets these requirements, all amounts paid under
the arrangement are treated as paid under an accountable plan and are excluded from
income and wages. If an arrangement does not meet these requirements, all amounts
paid under the arrangement are treated as paid under a nonaccountable plan and are
included in an employee's gross income, must be reported as wages or compensation
on the employee's Form W-2, and are subject to the withholding and payment of
employment taxes. Section 1.62-2(e)(2) specifically provides that substantiation of
certain business expenses in accordance with rules prescribed under the authority of

1.274-5(g) is treated as substantiation of the amount of the expenses for purposes of

1.62-2. Under 1.62-2(f)(2), the Commissioner may prescribe rules under which an
arrangement providing per diem allowances is 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 the allowance that relates to days of travel
substantiated and that exceeds the amount of the employee's expenses deemed

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substantiated under rules prescribed under 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 within a reasonable period
of time any portion of the allowance that relates to days of travel not substantiated.

.08 Section 1.62-2(h)(2)(i)(B) provides that, if a payor pays a per diem allowance that
meets the requirements of 1.62-2(c)(1), the portion, if any, of the allowance that
relates to days of travel substantiated in accordance with 1.62-2(e), that exceeds the
amount of an employee's expenses deemed substantiated for the travel under rules
prescribed under 274(d) and 1.274-5(g), and that the employee is not required to
return, is subject to withholding and payment of employment taxes. See 31.3121(a)-
3, 31.3231(e)-1(a)(5), 31.3306(b)-2, and 31.3401(a)-4 of the Employment Tax
Regulations. Because the employee is not required to return this excess portion, the
reasonable period of time provisions of 1.62-2(g) (relating to the return of excess
amounts) do not apply to this portion.

.09 Under 1.62-2(h)(2)(i)(B)(4), the Commissioner has the discretion to prescribe
special rules regarding the timing of withholding and payment of employment taxes on
per diem allowances.

.10 Section 1.274-5(j)(1) grants the Commissioner the authority to establish a
method under which a taxpayer may elect to treat a specific amount as paid or incurred
for meals while traveling away from home in lieu of substantiating the actual cost of
meals.

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.11 Section 1.274-5(j)(3) grants the Commissioner the authority to establish a
method under which a taxpayer may elect to treat a specific amount as paid or incurred
for incidental expenses while traveling away from home in lieu of substantiating the
actual cost of incidental expenses.

.12 This revenue procedure includes modifications to Rev. Proc. 2008-59 as follows:

(1) Sections 3.02(1)(a), 4.04(6), and 5.06 provide transition rules for the last 3
months of calendar year 2009.

(2) Section 5.02 contains revisions to the per diem rates for high-cost localities
and for other localities for purposes of section 5.

(3) Section 5.03 contains the list of high-cost localities, and section 5.04
describes changes to the list of high-cost localities for purposes of section 5.

(4) The reference in section 6.04 to section 4.04 is deleted. Section 6.04
references taxpayers that use section 4.02 or 4.03 to determine the amount of travel
expenses deemed substantiated. Taxpayers described in section 4.04 use section 4.02
or 4.03. Therefore, the reference to section 4.04 in section 6.04 is unnecessary and
potentially confusing.

SECTION 3. DEFINITIONS

.01 Per diem allowance. The term "per diem allowance" means a payment under a
reimbursement or other expense allowance arrangement that is

(1) Paid for ordinary and necessary business expenses incurred, or that the payor
reasonably anticipates will be incurred, by an employee for lodging, meal, and incidental

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expenses, or for meal and incidental expenses, for travel away from home performing
services as an employee of the employer,

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

(3) Paid at or below 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 and federal M&IE rate.

(1) In general. The federal per diem rate is equal to the sum of the applicable
federal lodging expense rate and the applicable federal meal and incidental expense
(M&IE) rate for the day and locality of travel.

(a) CONUS rates. The rates for localities in the continental United States
("CONUS") are set forth in Appendix A to 41 C.F.R. ch. 301. However, in applying
section 4.01, 4.02, or 4.03 of this revenue procedure, taxpayers may continue to use the
CONUS rates in effect for the first 9 months of 2009 for expenses of all CONUS travel
away from home that are paid or incurred during calendar year 2009 in lieu of the
updated GSA rates. A taxpayer must consistently use either these rates or the updated
rates for the period October 1, 2009, through December 31, 2009.

(b) OCONUS rates. The rates for localities outside the continental United
States ("OCONUS") are established by the Secretary of Defense (rates for non-foreign
localities, including Alaska, Hawaii, Puerto Rico, the Northern Mariana Islands, and the
possessions of the United States) and by the Secretary of State (rates for foreign

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localities), and are published in the Per Diem Supplement to the Standardized
Regulations (Government Civilians, Foreign Areas) (updated on a monthly basis).

(c) Internet access to the rates. The CONUS and OCONUS rates may be
found on the Internet at www.gsa.gov.

(2) Locality of travel. The term "locality of travel" means the locality where an
employee traveling away from home performing services as an employee of an
employer stops for sleep or rest.

(3) Incidental expenses. The term "incidental expenses has the same meaning
as in the Federal Travel Regulations, 41 C.F.R. 300-3.1 (2009). The Federal Travel
Regulations currently include as incidental expenses fees and tips given to porters,
baggage carriers, bellhops, hotel maids, stewards or stewardesses and others on ships,
and hotel servants in foreign countries; transportation between places of lodging or
business and places where meals are taken, if suitable meals can be obtained at the
temporary duty site; and the mailing cost associated with filing travel vouchers and
payment of employer-sponsored charge card billings.

.03 Flat rate or stated schedule.

(1) In general. Except as provided in section 3.03(2) of this revenue procedure,
an allowance is paid at a flat rate or stated schedule if it is provided on a uniform and
objective basis for the expenses described in section 3.01 of this revenue procedure.
The allowance may be paid for the number of days away from home performing
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

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to cover meal and incidental expenses paid to a pilot or flight attendant who is traveling
away from home performing 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 (such
as cents per mile) to cover meal and incidental expenses paid to an over-the-road truck
driver who is traveling away from home performing services as an employee is an
allowance paid at a flat rate or stated schedule.

(2) Limitation. An allowance that is computed on a basis similar to that used in
computing an employee's wages or other compensation (such as the number of hours
worked, miles traveled, or pieces produced) does not meet the business connection
requirement of 1.62-2(d), is not a per diem allowance, and is not paid at a flat rate or
stated schedule, unless, as of December 12, 1989, (a) the allowance was identified by
the payor either by making a separate payment or by specifically identifying the amount
of the allowance, or (b) an allowance computed on that basis was commonly used in the
industry in which the employee performed services. See 1.62-2(d)(3)(ii).

SECTION 4. PER DIEM SUBSTANTIATION METHOD

.01 Per diem allowance. If a payor pays a per diem allowance in lieu of reimbursing
actual 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 for
each calendar day is equal to the lesser of the per diem allowance for that day or the
amount computed at the federal per diem rate (see section 3.02 of this revenue
procedure) for the locality of travel for that day (or partial day, see section 6.04 of this
revenue procedure).

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.02 Meal and incidental expenses only per diem allowance. If a payor pays a per
diem allowance only for meal and incidental expenses in lieu of reimbursing actual 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 for each calendar day
is equal to the lesser of the per diem allowance for that day or the amount computed at
the federal M&IE rate for the locality of travel for that day (or partial day). A per diem
allowance is treated as paid only for meal and incidental expenses if (1) the payor pays
the employee for actual expenses for lodging based on receipts submitted to the payor,
(2) the payor provides the lodging in kind, (3) the payor pays the actual expenses for
lodging directly to the provider of the lodging, (4) the payor does not have a reasonable
belief that lodging expenses were or will be incurred by the employee, or (5) the
allowance is computed on a basis similar to that used in computing an employee's
wages or other compensation (such as the number of hours worked, miles traveled, or
pieces produced).

.03 Optional method for meal and incidental expenses only deduction. In lieu of
using actual expenses in computing the amount allowable as a deduction for ordinary
and necessary meal and incidental expenses paid or incurred for travel away from
home, employees and self-employed individuals who pay or incur meal expenses may
use an amount computed at the federal M&IE rate for the locality of travel for each
calendar day (or partial day) the employee or self-employed individual is away from
home. This amount is deemed substantiated for purposes of paragraphs (b)(2) and (c)
of 1.274-5, provided the employee or self-employed individual substantiates the

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elements of time, place, and business purpose of the travel for that day (or partial day)
in accordance with those regulations. See section 6.05(1) of this revenue procedure for
rules related to the application of the limitation under 274(n) to amounts determined
under this section 4.03. See section 4.05 of this revenue procedure for a method for
substantiating incidental expenses that may be used by employees or self-employed
individuals who do not pay or incur meal expenses.

.04 Special rules for transportation industry.

(1) In general. This section 4.04 applies to (a) a payor that pays a per diem
allowance only for meal and incidental expenses for travel away from home to an
employee in the transportation industry and computes the amount under section 4.02 of
this revenue procedure, or (b) an employee or self-employed individual in the
transportation industry who computes the amount allowable as a deduction for meal and
incidental expenses for travel away from home under section 4.03 of this revenue
procedure.

(2) Transportation industry defined. For purposes of this section 4.04, an
employee or self-employed individual is in the transportation industry only if the
employee's or self-employed individual's work (a) is of the type that directly involves
moving people or goods by airplane, barge, bus, ship, train, or truck, and (b) regularly
requires travel away from home which, during any single trip away from home, usually
involves travel to localities with differing federal M&IE rates. For purposes of the
preceding sentence, a payor must determine that an employee or a group of employees

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is in the transportation industry by using a method that is consistently applied and in
accordance with reasonable business practice.

(3) Rates. A taxpayer described in section 4.04(1) of this revenue procedure may
treat $59 as the federal M&IE rate for any CONUS locality of travel, and $65 as the
federal M&IE rate for any OCONUS locality of travel. A payor that uses either (or both)
of these special rates for an employee must use the special rate(s) for all amounts
deemed substantiated under section 4.02 of this revenue procedure paid to that
employee for travel away from home within CONUS and/or OCONUS, as the case may
be, during the calendar year. Similarly, an employee or self-employed individual that
uses either (or both) of these special rates must use the special rate(s) for all amounts
deemed substantiated under section 4.03 of this revenue procedure for travel away
from home within CONUS and/or OCONUS, as the case may be, during the calendar
year. See section 4.04(6) of this revenue procedure for transition rules.

(4) Periodic rule. A payor described in section 4.04(1) of this revenue procedure
may compute the amount of the employee's expenses that is deemed substantiated
under section 4.02 of this revenue procedure periodically (not less frequently than
monthly), rather than daily, by comparing the total per diem allowance paid for the
period to the sum of the amounts computed either at the federal M&IE rate(s) for the
localities of travel, or at the special rate described in section 4.04(3), for the days (or
partial days) the employee is away from home during the period.

(5) Examples.

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(a) Example 1. Taxpayer, an employee in the transportation industry, travels
away from home on business within CONUS on 16 days (including partial days) during
a calendar month. A payor pays Taxpayer a per diem allowance only for meal and
incidental expenses that the payor computes using section 4.04(3) of this revenue
procedure and the method of proration described in section 6.04(2) of this revenue
procedure. The amount deemed substantiated under section 4.02 of this revenue
procedure is equal to the lesser of the total per diem allowance paid for the month or
$944 (16 days at $59 per day).

(b) Example 2. Taxpayer, a truck driver employee in the transportation
industry, is paid a "cents-per-mile" allowance that qualifies as an allowance paid under a
flat rate or stated schedule as defined in section 3.03 of this revenue procedure.
Taxpayer travels away from home on business for 10 days. Based on the number of
miles driven by Taxpayer, Taxpayer's employer pays an allowance of $500 for the 10
days of business travel. Taxpayer actually drives for 8 days, and does not drive for the
other 2 days Taxpayer is away from home. Taxpayer is paid under the periodic rule
used for transportation industry employers and employees in accordance with section
4.04(4) of this revenue procedure. The amount deemed substantiated is the full $500
because that amount does not exceed $590 (ten days away from home at $59 per day).

(6) Transition rules. Under the calendar-year convention provided in section
4.04(3), a taxpayer who used the federal M&IE rates during the first 9 months of
calendar year 2009 to substantiate the amount of an individual's travel expenses under
sections 4.02 or 4.03 of Rev. Proc. 2008-59 may not use, for that individual, the special

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transportation industry rates provided in this section 4.04 until January 1, 2010.
Similarly, a taxpayer who used the special transportation industry rates during the first 9
months of calendar year 2009 to substantiate the amount of an individual's travel
expenses may not use, for that individual, the federal M&IE rates until January 1, 2010.

.05 Optional method for incidental expenses only deduction. In lieu of using actual
expenses in computing the amount allowable as a deduction for ordinary and necessary
incidental expenses paid or incurred for travel away from home, employees and self-
employed individuals who pay or incur incidental expenses but do not pay or incur meal
expenses for a calendar day (or partial day) of travel away from home may use, for
each calendar day (or partial day) the employee or self-employed individual is away

from home, an amount computed at the rate of $5 per day for any CONUS or OCONUS
locality of travel. This amount is deemed substantiated for purposes of paragraphs
(b)(2) and (c) of 1.274-5, provided the employee or self-employed individual
substantiates the elements of time, place, and business purpose of the travel for that
day (or partial day) in accordance with those regulations. See section 4.03 of this
revenue procedure for a method that may be used by employees or self-employed
individuals who pay or incur meal expenses. The method authorized by this section
4.05 may not be used by payors that use section 4.01, 4.02, or 5.01 of this revenue
procedure, or by employees or self-employed individuals who use the method described
in section 4.03 of this revenue procedure. See section 6.05(5) of this revenue
procedure for rules related to the application of the limitation under 274(n) to amounts
determined under this section 4.05.

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# SECTION 5. HIGH-LOW SUBSTANTIATION METHOD

.01 In general. If a payor pays a per diem allowance in lieu of reimbursing actual
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 for each calendar day is equal to the lesser of the per diem
allowance for that day or the amount computed at the rate provided in section 5.02 of
this revenue procedure for the locality of travel for that day (or partial day, see section
6.04 of this revenue procedure). Except as provided in section 5.06 of this revenue
procedure, this high-low substantiation method may be used in lieu of the per diem
substantiation method provided in section 4.01 of this revenue procedure, but may not
be used in lieu of the meal and incidental expenses only per diem substantiation method
provided in section 4.02 of this revenue procedure.

.02 Specific high-low rates. Except as provided in section 5.06 of this revenue
procedure, the per diem rate set forth in this section 5.02 is $258 for travel to any
"high-cost locality" specified in section 5.03 of this revenue procedure, or $163 for travel
to any other locality within CONUS. The high or low rate, as appropriate, applies as if it
were the federal per diem rate for the locality of travel. For purposes of applying the
high-low substantiation method and the 274(n) limitation on meal expenses (see
section 6.05(3) of this revenue procedure), the amount of the high and low rates that is
treated as paid for meals is $65 for a high-cost locality and $52 for any other locality
within CONUS.

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.03 High-cost localities. The following localities have a federal per diem rate of $211
or more, and are high-cost localities for all of the calendar year or the portion of the
calendar year specified in parentheses under the key city name:

Key city

County or other defined location

Arizona

Phoenix/Scottsdale

Maricopa

(January 1-May 31)

Sedona (March 1-April 30)

City limits of Sedona

California

Monterey

Monterey

Napa

Napa

(October 1-November 30 and April 1-September 30)

San Diego

San Diego

San Francisco

San Francisco

Santa Barbara

Santa Barbara

Santa Monica

City limits of Santa Monica

South Lake Tahoe (December 1-March 31)

El Dorado

Colorado

Aspen

Pitkin

(December 1-April 30)

Denver/Aurora

Denver, Adams, Arapahoe, and Jefferson

Steamboat Springs (December 1-March 31)

Routt

Telluride

San Miguel

(December 1-March 31 and June

1-September 30)

Vail

Eagle

(December 1-March 31)

District of Columbia

Washington D.C. (also the cities of Alexandria, Falls Church, and Fairfax, and the
counties of Arlington and Fairfax, in Virginia; and the counties of Montgomery and
Prince George's in Maryland) (See also Maryland and Virginia)

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Florida

Fort Lauderdale (October 1-April 30)

Broward

Fort Walton Beach/De Funiak Springs (June 1-July 31)

Okaloosa and Walton

Key West

Monroe

Miami

Miami-Dade

(January 1-March 31)

Naples

Collier

(January 1-April 30)

Illinois

Chicago

Cook and Lake

Maine

Bar Harbor

Hancock

(July 1-August 31)

Maryland

Baltimore City

Baltimore City

(October 1-November 30 and March 1-September 30)

Cambridge/St. Michaels (June 1-August 31)

Dorchester and Talbot

Ocean City

Worcester

(June 1-August 31)

Washington, DC Metro Area

Montgomery and Prince George s

Massachusetts

Boston/Cambridge

Suffolk, City of Cambridge

Martha's Vineyard

Dukes

(June 1-August 31)

Nantucket

Nantucket

(June 1-September 30)

New Hampshire

Conway

Carroll

(July 1-August 31)

New York

Floral Park/Garden City/Great Neck

Nassau

Glens Falls

Warren

(July 1-August 31)

Lake Placid

Essex

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(July 1-August 31)
Manhattan (includes the boroughs of
Manhattan, Brooklyn, the Bronx, Queens
and Staten Island)
Saratoga Springs/Schenectady
(July 1-August 31)
Tarrytown/White Plains/New Rochelle

Bronx, Kings, New York, Queens,
Richmond

Saratoga and Schenectady

Westchester

Pennsylvania
Hershey
(June 1-August 31)
Philadelphia

City of Hershey
Philadelphia

Rhode Island
Jamestown/Middletown/Newport
(October 1-October 31 and May 1-September 30)

Newport

Utah
Park City
(January 1-March 31)

Summit

Virginia
Washington, DC Metro Area

Cities of Alexandria, Fairfax, and
Falls Church; counties of
Arlington and Fairfax

Washington
Seattle

King

Teton and Sublette

Wyoming
Jackson/Pinedale
(July 1-August 31)

.04 Changes in high-cost localities. The list of high-cost localities in section 5.03 of

this revenue procedure differs from the list of high-cost localities in section 5.03 of Rev.
Proc. 2008-59 (changes listed by key cities).

(1) The following localities have been added to the list of high-cost localities:
Monterey, California; Denver/Aurora, Colorado; Bar Harbor, Maine; Conway, New
Hampshire; Glens Falls, New York; Lake Placid, New York; and Hershey, Pennsylvania.

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(2) The portion of the year for which the following are high-cost localities has
been changed: Phoenix/Scottsdale, Arizona; Napa, California; San Diego, California;
Telluride, Colorado; Vail, Colorado; Miami, Florida; Naples, Florida; Baltimore City,
Maryland; Cambridge/St. Michaels, Maryland; Ocean City, Maryland; and
Jamestown/Middletown/Newport, Rhode Island.

(3) The following localities have been removed from the list of high-cost localities:
Crested Butte/Gunnison, Colorado; Silverthorne/Breckenridge, Colorado; and Palm
Beach, Florida.

(4) The following localities have been redefined: Floral Park/Garden City/Great
Neck, New York no longer includes Glen Gove and Roslyn; Tarrytown/White Plains/New
Rochelle, New York no longer includes Yonkers.

.05 Specific limitation.

(1) Except as provided in section 5.05(2) of this revenue procedure, a payor that
uses the high-low substantiation method for an employee must use that method for all
amounts paid to that employee for travel away from home within CONUS during the
calendar year. See section 5.06 of this revenue procedure for transition rules.

(2) For an employee described in section 5.05(1) of this revenue procedure, the
payor may reimburse actual expenses or use the meal and incidental expenses only per
diem substantiation method described in section 4.02 of this revenue procedure for any
travel away from home, and may use the per diem substantiation method described in
section 4.01 of this revenue procedure for any OCONUS travel away from home.

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.06 Transition rules. A payor who used the substantiation method of section 4.01 of
Rev. Proc. 2008-59 for an employee during the first 9 months of calendar year 2009
may not use the high-low substantiation method in section 5 of this revenue procedure
for that employee until January 1, 2010. A payor who used the high-low substantiation
method of section 5 of Rev. Proc. 2008-59 for an employee during the first 9 months of
calendar year 2009 must continue to use the high-low substantiation method for the
remainder of calendar year 2009 for that employee. A payor described in the previous
sentence may use the rates and high-cost localities published in section 5 of Rev. Proc.
2008-59, in lieu of the updated rates and high-cost localities provided in section 5 of this
revenue procedure, for travel on or after October 1, 2009, and before January 1, 2010, if
those rates and localities are used consistently during this period for all employees
reimbursed under this method.

SECTION 6. LIMITATIONS AND SPECIAL RULES

.01 In general. The federal per diem rate and the federal M&IE rate described in
section 3.02 of this revenue procedure for the locality of travel apply in the same
manner as they apply under the Federal Travel Regulations, 41 C.F.R. Part 301-11
(2009), except as provided in sections 6.02 through 6.04 of this revenue procedure.
.02 Federal per diem rate. A receipt for lodging expenses is not required in
determining the amount of expenses deemed substantiated under section 4.01 or 5.01
of this revenue procedure. See section 7.01 of this revenue procedure for the
requirement that the employee substantiate the time, place, and business purpose of
the expense.

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.03 Federal per diem or M&IE rate. A payor is not required to reduce the federal per
diem rate or the federal M&IE rate for the locality of travel for meals provided in kind,
provided the payor has a reasonable belief that the employee incurred or will incur meal
and incidental expenses during each day of travel.

.04 Proration of the federal per diem or M&IE rate. Under 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. The method described in section 6.04(1) of this
revenue procedure must be used for purposes of determining the amount deemed
substantiated under section 4.03 or 4.05 of this revenue procedure for partial days of
travel away from home. For purposes of determining the amount deemed substantiated
under section 4.01, 4.02, or 5 of this revenue procedure for partial days of travel away
from home, either of the following methods may be used to prorate the federal M&IE
rate to determine the federal per diem rate or the federal M&IE rate for the partial days
of travel:

(1) The rate may be prorated using the method prescribed by the Federal Travel
Regulations. Currently the Federal Travel Regulations allow three-fourths of the
applicable federal M&IE rate for each partial day during which an employee or self-
employed individual is traveling away from home performing services as an employee
or self-employed individual. The same ratio may be applied to prorate the allowance for
incidental expenses described in section 4.05 of this revenue procedure; or

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(2) The rate may be prorated 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 two times the federal M&IE rate is treated as being in
accordance with reasonable business practice (even though the Federal Travel
Regulations would allow only one and a half times the federal M&IE rate).

.05 Application of the appropriate 274(n) limitation on meal expenses. Except as
provided in section 6.05(5), all or part of the amount of an expense deemed
substantiated under this revenue procedure is subject to the appropriate limitation under
274(n) (see section 2.02 of this revenue procedure) on the deductibility of food and
beverage expenses.

(1) If an amount for meal and incidental expenses is computed under section 4.03
of this revenue procedure, a taxpayer must treat that amount as an expense for food
and beverages.

(2) If a per diem allowance is paid only for meal and incidental expenses, a payor
must treat an amount equal to the lesser of the allowance or the federal M&IE rate for
the locality of travel for each day (or partial day, see section 6.04 of this revenue
procedure) as an expense for food and beverages.

(3) If a per diem allowance is paid for lodging, meal, and incidental expenses for
each calendar day (or partial day) an employee is away from home at a rate equal to or
in excess of the federal per diem rate for the locality of travel, a payor must treat an

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amount equal to the federal M&IE rate for the locality of travel for each calendar day (or
partial day) as an expense for food or beverages.

(4) If a per diem allowance is paid for lodging, meal, and incidental expenses for
each calendar day (or partial day) an employee is away from home at a rate less than
the federal per diem rate for the locality of travel, a payor must:

(a) Treat an amount equal to the federal M&IE rate for the locality of travel for
each calendar day (or partial day) or, if less, the amount of the allowance, as an
expense for food or beverages; or

(b) Treat an amount equal to 40 percent of the allowance as an expense for
food or beverages.

(5) If an amount for incidental expenses is computed under section 4.05 of this
revenue procedure, none of the amount is subject to limitation under 274(n).

.06 No double reimbursement or deduction. If a payor pays a per diem allowance in
lieu of reimbursing actual lodging, meal, and incidental expenses, or meal and incidental
expenses, in accordance with section 4 or 5 of this revenue procedure, and the amount
is treated as paid under an accountable plan, any additional payment for those
expenses is treated as paid under a nonaccountable plan, is included in an employee's
gross income, is reported as wages or other compensation on the employee's Form W-
2, and is subject to withholding and payment of employment taxes. Similarly, if an
employee or self-employed individual computes the amount allowable as a deduction for
meal and incidental expenses for travel away from home in accordance with section
4.03 or 4.04 of this revenue procedure, no other deduction is allowed to the employee

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or self-employed individual for those expenses. For example, assume an employee
receives a per diem allowance from a payor for lodging, meal, and incidental expenses,
or for meal and incidental expenses, incurred while traveling away from home and the
amount is treated as paid under an accountable plan. During that trip, the employee
pays for dinner for the employee and two business associates. The payor reimburses
as a business entertainment meal expense the meal expense for the employee and the
two business associates. Because the payor also pays a per diem allowance to cover
the cost of the employee's meals, the amount paid for the employee's portion of the
business entertainment meal expense is treated as paid under a nonaccountable plan,
is reported as wages or other compensation on the employee's Form W-2, and is
subject to withholding and payment of employment taxes.

.07 Related parties. Sections 4.01 and 5 of this revenue procedure do not apply if a
payor and an employee are related within the meaning of 267(b), but for this purpose
the percentage of ownership interest referred to in 267(b)(2) is 10 percent.
SECTION 7. APPLICATION

.01 An employee satisfies the adequate accounting and substantiation requirements
of § 1.274-5(c) and (f)(4) and § 1.274-5T(c) if-

(1) The employee uses this revenue procedure to substantiate to a payor the
amount of the employee's travel expenses, and

(2) Within a reasonable period of time, the employee also substantiates to the
payor the elements of time, place, and business purpose of the travel in accordance
with 1.274-5T(b)(2) and (c) and § 1.274-5(c) (other than 1.274-5(c)(2)(iii)(A)).

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.02 An arrangement providing per diem allowances is treated as satisfying the
requirement of 1.62-2(f)(2) of returning amounts in excess of expenses if an employee
is required to return within a reasonable period of time (as defined in 1.62-2(g)) any
portion of the allowance that relates to days of travel not substantiated, even though the
arrangement does not require the employee to return the portion of the allowance that
relates to days of travel substantiated and 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 $250, based on an
anticipated 5 days of business travel at $50 per day to a locality for which the federal
M&IE rate is $46, and the employee substantiates 3 full days of business travel. The
requirement to return excess amounts is treated as satisfied if the employee is required
to return within a reasonable period of time (as defined in 1.62-2(g)) the portion of the
allowance that is attributable to the 2 unsubstantiated days of travel ($100), even
though the employee is not required to return the portion of the allowance ($12) that
exceeds the amount of the employee's expenses deemed substantiated under section
4.02 of this revenue procedure ($138) for the 3 substantiated days of travel. However,
the $12 excess portion of the allowance is treated as paid under a nonaccountable plan
as discussed in section 7.04 of this revenue procedure.

.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 deemed
substantiated under the rules provided in section 4 or 5 of this revenue procedure if the
employee substantiates the business travel expenses covered by the per diem

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allowance in accordance with section 7.01 of this revenue procedure. See

1.274-5T(f)(2)(i). If the remaining requirements for an accountable plan provided in
§ 1.62-2 are satisfied, that portion of the allowance is treated as paid under an
accountable plan, is not reported as wages or other compensation on the employee's
Form W-2, and is exempt from the withholding and payment of employment taxes. See
1.62-2(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 deemed substantiated
under the rules provided in section 4 or 5 of this revenue procedure if the employee
substantiates the business travel expenses covered by the per diem allowance in
accordance with section 7.01 of this revenue procedure. See 1.274-5T(f)(2)(ii). In
addition, the excess portion of the allowance is treated as paid under a nonaccountable
plan, is reported as wages or other compensation on the employee's Form W-2, and is
subject to withholding and payment of employment taxes. See 1.62-2(c)(3)(ii), (c)(5),
and (h)(2)(i)(B).

.05 If the amount of the expenses that is deemed substantiated under the rules
provided in section 4.01, 4.02, or 5 of this revenue procedure is less than the amount of
an employee's business expenses for travel away from home, an 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 (not just the excess over the federal per diem rate), includes
on Form 2106, "Employee Business Expenses," the deemed substantiated portion of

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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 1.274-5T(f)(2)(iii). However, for purposes of
claiming this itemized deduction for meal and incidental expenses, substantiation of the
amount of the expenses is not required if the employee is claiming a deduction that is
equal to or less than the amount computed under section 4.03 of this revenue
procedure minus the amount deemed substantiated under sections 4.02 and 7.01 of this
revenue procedure. The itemized deduction is subject to the appropriate limitation (see
section 2.02 of this revenue procedure) on meal and entertainment expenses in
274(n) and the 2-percent floor on miscellaneous itemized deductions in 67.

.06 An employee who pays or incurs meal expenses and does not receive a per
diem allowance for meal and incidental expenses may deduct an amount computed
under section 4.03 of this revenue procedure only as an itemized deduction. This
itemized deduction is subject to the appropriate limitation on meal and entertainment
expenses in 274(n) and the 2-percent floor on miscellaneous itemized deductions in
67. See section 7.07 of this revenue procedure for the treatment of an employee who
does not pay or incur amounts for meal expenses and does not receive a per diem
allowance for incidental expenses.

.07 An employee who does not pay or incur amounts for meal expenses and does
not receive a per diem allowance for incidental expenses may deduct an amount
computed under section 4.05 of this revenue procedure only as an itemized deduction.
This itemized deduction is subject to the 2-percent floor on miscellaneous itemized

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deductions 67. See section 7.06 of this revenue procedure for the treatment of an
employee who pays or incurs amounts for meal expenses and does not receive a per
diem allowance for meal and incidental expenses.

.08 A self-employed individual who pays or incurs meal expenses for a calendar day
(or partial day) of travel away from home may deduct an amount computed under
section 4.03 of this revenue procedure in determining adjusted gross income under
62(a)(1). This deduction is subject to the appropriate limitation on meal and
entertainment expenses in 274(n).

.09 A self-employed individual who does not pay or incur meal expenses for a
calendar day (or partial day) of travel away from home may deduct an amount
computed under section 4.05 of this revenue procedure in determining adjusted gross
income under 62(a)(1).

SECTION 8. WITHHOLDING AND PAYMENT OF EMPLOYMENT TAXES

.01 The portion of a per diem allowance, if any, that relates to the days of business
travel substantiated and that exceeds the amount deemed substantiated for those days
under section 4.01, 4.02, or 5 of this revenue procedure is treated as paid under a
nonaccountable plan and is subject to withholding and payment of employment taxes.
See 1.62-2(h)(2)(i)(B).

.02 In the case of a per diem allowance paid as a reimbursement, the excess
described in section 8.01 of this revenue procedure is subject to withholding and
payment of employment taxes in the payroll period in which a payor reimburses the
expenses for the days of travel substantiated. See 1.62-2(h)(2)(i)(B)(2).

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.03 In the case of a per diem allowance paid as an advance, the excess described in
section 8.01 of this revenue procedure is subject to withholding and payment of
employment taxes no later than the first payroll period following the payroll period in
which the days of travel for which the advance was paid are substantiated. See

1.62-2(h)(2)(i)(B)(3). If an employee does not substantiate some or all of the days of
travel for which the advance was paid within a reasonable period of time or does not
return the portion of the allowance that relates to those days within a reasonable period
of time, the portion of the allowance that relates to those days is subject to withholding
and payment of employment taxes no later than the first payroll period following the end
of the reasonable period. See 1.62-2(h)(2)(i)(A).

.04 In the case of a per diem allowance only for meal and incidental expenses for
travel away from home paid to an employee in the transportation industry by a payor
that uses the rule in section 4.04(4) of this revenue procedure, the excess of the per
diem allowance paid for the period over the amount deemed substantiated for the
period under section 4.02 of this revenue procedure (after applying section 4.04(4) of
this revenue procedure), is subject to withholding and payment of employment taxes no
later than the first payroll period following the payroll period in which the excess is
computed. See 1.62-2(h)(2)(i)(B)(4).

.05 For example, assume that an employer pays an employee a per diem allowance
under an arrangement that otherwise meets the requirements of an accountable plan to
cover business expenses for meals and lodging for travel away from home at a rate of
120 percent of the federal per diem rate for the localities to which the employee travels.

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The employer does not require the employee to return the 20 percent by which the
reimbursement for those expenses exceeds the federal per diem rate. The employee
substantiates 6 days of travel away from home: 2 days in a locality in which the federal
per diem rate is $160 and 4 days in a locality in which the federal per diem rate is $120.
The employer reimburses the employee $960 for the 6 days of travel away from home
(2 x (120% x $160) + 4 x (120% x $120)), and does not require the employee to return
the excess payment of $160 (2 days x $32 ($192-$160) + 4 days x $24 ($144-$120)).
For the payroll period in which the employer reimburses the expenses, the employer
must withhold and pay employment taxes on $160. See section 8.02 of this revenue
procedure.

.06 All payments to an employee under a per diem allowance arrangement are
treated as paid under a nonaccountable plan if the reimbursement arrangement
evidences a pattern of abuse. An arrangement evidences a pattern of abuse if, for
example, it has no process to determine when an allowance exceeds the amount that
may be deemed substantiated and the arrangement routinely pays allowances in
excess of the amount that may be deemed substantiated without requiring actual
substantiation or repayment of the excess amount or treating the excess allowances as
wages for employment tax purposes. See 62(c), § 1.62-2(k), and Rev. Rul. 2006-56,
2006-2 C.B. 874. Thus, these payments are included in the employee's gross income,
are reported as wages or other compensation on the employee's Form W-2, and are
subject to withholding and payment of employment taxes. See § 1.62-2(c)(3), (c)(5),
and (h)(2).

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## SECTION 9. EFFECTIVE DATE

This revenue procedure is effective for per diem allowances for lodging, meal and
incidental expenses, or for meal and incidental expenses only that are paid to an
employee on or after October 1, 2009, for travel away from home on or after October 1,
2009. For purposes of computing the amount allowable as a deduction for travel away
from home, this revenue procedure is effective for meal and incidental expenses or for
incidental expenses only paid or incurred on or after October 1, 2009.

SECTION 10. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2008-59 is superseded.

# DRAFTING INFORMATION

The principal author of this revenue procedure is Karla M. Meola of the Office of
Associate Chief Counsel (Income Tax and Accounting). For further information
regarding this revenue procedure, contact Ms. Meola at (202) 622-4930 (not a toll-free
call).