1. Purpose

This revenue procedure updates Rev. Proc. 2002-63, 2002-41 I.R.B. 691, by providing
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 will be 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 pay or incur meal
costs to use in computing the deductible costs of business meal and incidental expenses
paid or incurred while traveling away from home. This revenue procedure also provides
an optional method for use in computing the deductible costs of incidental expenses paid
or incurred while traveling away from home by employees and self-employed individuals
who do not pay or incur meal costs and who are not reimbursed for the incidental
expenses. Use of a method described in this revenue procedure is not mandatory, and a
taxpayer may use actual allowable expenses if the 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 will be deemed
substantiated when a payor provides an allowance to pay for those expenses but not meal
and incidental expenses.

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 the travel expenses that is 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) gradually increases the
deductible percentage to 80 percent for taxable years beginning in 2008. For taxable
years beginning in 2003, the deductible percentage for these expenses is 65 percent. For
taxable years beginning in 2004, the deductible percentage for these expenses is 70
percent.

.03 Section 274(d) provides, in part, that no deduction shall be allowed under 162 for any
traveling expense (including meals and lodging while away from home) unless the
taxpayer 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
such 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. Pursuant to this
grant of authority, the Commissioner may prescribe rules under which such arrangements
or allowances, if in accordance with reasonable business practice, will be regarded (1) as
equivalent to substantiation, by adequate records or other sufficient evidence, of the
amount of such 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 such 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, paid or incurred by the employee in connection with the performance of
services as an employee under a reimbursement or other expense allowance arrangement
with a payor.

.06 Section 62(c) provides that an arrangement will not be 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
(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 the substantiation requirements described therein shall
not apply to any expense to the extent that, under the grant of regulatory authority
prescribed in 274(d), the Commissioner has provided that substantiation is not required
for such expense.

.07 Under 1.62-2(c)(1) 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. 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)
or 1.274-5(j) will be treated as substantiation of the amount of such 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 will be 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 such an allowance that relates to
days of travel substantiated and that exceeds the amount of the employee's expenses
deemed substantiated pursuant to 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 any portion of such an
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 the
employee's expenses deemed substantiated for such travel pursuant to rules prescribed
under 274(d) and 1.274-5(g) or 1.274-5(j), 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 use a specified amount for meals paid or incurred
while traveling away from home in lieu of substantiating the actual cost of meals.

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

.12 Sections 4.04(5) and 5.06 of this revenue procedure provide transition rules for the
last 2 months of calendar year 2003.

.13 Section 4.05 of this revenue procedure is revised to provide a new rate for
substantiating only incidental expenses for any OCONUS locality of travel.

.14 Section 5.02 of this revenue procedure contains revisions to the per diem rates for
high-cost localities and for other localities for purposes of section 5.

.15 Sections 5.03 and 5.04 of this revenue procedure contain revisions to the list of highcost
localities for purposes of section 5.

3. Definitions
.01 Per diem allowance. The term "per diem allowance" means a payment under a
reimbursement or other expense allowance arrangement that meets the requirements
specified in 1.62-2(c)(1) and that is
(1) paid with respect to ordinary and necessary business expenses incurred, or
which the payor reasonably anticipates will be incurred, by an employee for
lodging, meal, and incidental expenses, or for meal and incidental expenses for
travel away from home in connection with the performance of 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) General rule. 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, a taxpayer may
continue to use the CONUS rates in effect after October 1, 2002, that the taxpayer
most recently used prior to October 1, 2003, for expenses of all CONUS travel
away from home that are paid or incurred during the last three months of 2003, in
lieu of the GSA rates that are updated effective October 1, 2003, provided that the
taxpayer consistently uses those prior rates for the last three months of 2003.
(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 localities), and are published in the Per Diem Supplement to the
Standardized Regulations (Government Civilians, Foreign Areas) (updated on a
monthly basis).

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

(3) Incidental expenses. The term incidental expenses has the meaning given to it
in the Federal Travel Regulations, 41 C.F.R. 300-3.1 (2003). Thus, based on the
current definition of "incidental expenses" in the Federal Travel Regulations,
"incidental expenses" means 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 cannot 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 with respect to the expenses described in section 3.01 of this
revenue procedure. Such allowance may be paid with respect to the number of
days away from home in connection with the performance of 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 to cover meal
and incidental expenses paid to a pilot or flight attendant who is traveling away
from home in connection with the performance of 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
in connection with the performance of services as an employee is an allowance
paid at a flat rate or stated schedule.

(2) Limitation. For purposes of this revenue procedure, an allowance that is
computed on a basis similar to that used in computing the 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 is employed. See 1.62-2(d)(3)(ii).

4. Per Diem Substantiation Method
.01 Per diem allowance. If a payor pays a per diem allowance in lieu of reimbursing
actual expenses for 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).

.02 Meals 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 expenses
for 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 the 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. Such
amount will be 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 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 as
described in section 4.02 of this revenue procedure to an employee in the
transportation industry, 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 in accordance with
section 4.03 of this revenue procedure.

(2) Rates. A taxpayer described in section 4.04(1) of this revenue procedure may
treat $41 as the federal M&IE rate for any CONUS locality of travel, and $46 as
the federal M&IE rate for any OCONUS locality of travel. A payor that uses
either (or both) of these special rates with respect to an employee must use the
special rate(s) for all amounts subject to 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 computed pursuant to 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(5) of this revenue
procedure for transition rules.

(3) 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 at the federal M&IE rate(s) for the
localities of travel for the days (or partial days) the employee is away from home
during the period. For example, assume an employee in the transportation
industry travels away from home within CONUS on 17 days (including partial
days) during a calendar month and receives a per diem allowance only for meal
and incidental expenses from a payor that uses the special rule under section
4.04(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 $697 (17 days at $41 per day).

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

(5) Transition rules. Under the calendar-year convention provided in section
4.04(2), a taxpayer who used the federal M&IE rates during the first 10 months of
calendar year 2003 to substantiate the amount of an individual's travel expenses
under sections 4.02 or 4.03 of Rev. Proc. 2002-63 may not use, for that individual,
the special transportation industry rates provided in this section 4.04 until January
1, 2004. Similarly, a taxpayer who used the special transportation industry rates
during the first 10 months of calendar year 2003 to substantiate the amount of an
individual's travel expenses may not use, for that individual, the federal M&IE
rates until January 1, 2004.

.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 selfemployed
individuals who 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 $3 per day for any CONUS or OCONUS locality of travel. Such amount will be
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(4) of
this revenue procedure for rules related to the application of the limitation under 274(n)
to amounts determined under this section 4.05.

5. High-Low Substantiation Method
.01 General rule. If a payor pays a per diem allowance in lieu of reimbursing actual
expenses for 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 such day or the amount computed at the rate set forth in section 5.02 of this
revenue procedure for the locality of travel for such 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 meals only substantiation method provided in section 4.02 or 4.03 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 $207 for travel to any "high-cost
locality" specified in section 5.03 of this revenue procedure, or $126 for travel to any
other locality within CONUS. Whichever per diem rate applies, it is applied 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 of
this revenue procedure), the federal M&IE rate shall be treated as $46 for a high-cost
locality and $36 for any other locality within CONUS.

.03 High-cost localities. The following localities have a federal per diem rate of $167 or
more, and are high-cost localities for all of the calendar year or the portion of the
calendar year specified in parenthesis under the key city name, except as provided in
section 5.06 of this revenue procedure:

Key city County or other defined location California
Napa Napa(April 1-November 15)
Palm Springs Riverside(January 1-May 31)
San Francisco San Francisco
Santa Monica City limits of Santa Monica
Tahoe City Placer

Colorado
Aspen Pitkin(January 1-April 30)
Silverthorne/Keystone Summit
Telluride San Miguel(December 20-September 30)
Vail Eagle(December 1-March 31)

District of Columbia
Washington, D.C. (also the cities of Alexandria, Fairfax, and Falls
Church, and the counties of Arlington, Fairfax, and Loudoun, in Virginia;
and the counties of Montgomery and Prince Georges in Maryland)

Florida
Key West Monroe(January 1-April 30)
Naples Collier(December 16-April 15)

Idaho
Coeur d'Alene Kootenai(June 1-September 30)
Sun Valley City limits of Sun Valley

Illinois
Chicago Cook and Lake

Louisiana
New Orleans/St. Bernard Orleans, St. Bernard,(January 1-May 31)
Plaquemine, and Jefferson Parishes

Maine
Kennebunk/Kittery/Sanford York(June 15-October 31)

Maryland
(For the counties of Montgomery and Prince George's, see District of Columbia)
Baltimore Baltimore
Ocean City Worcester(June 15-October 31)

Massachusetts
Boston Suffolk
Cambridge Middlesex (except Lowell)
Martha's Vineyard Dukes(June 1-October 15)
Nantucket Nantucket(June 15-October 15)

Michigan
Mackinac Island Mackinac
Traverse City Grand Traverse

Montana
Big Sky Gallatin (except West Yellowstone)

Nevada
Stateline Douglas

New Jersey
Atlantic City Atlantic(June 1-November 30)
Cape May Cape May (except Ocean City)(June 1-November 30)
Edison Middlesex (except Piscataway)
Newark Essex, Bergen, Hudson and Passaic
Ocean City City limits of Ocean City(June 15-September 15)
Piscataway/Belle Mead Somerset; and the city limits of Piscataway
Princeton/Trenton Mercer

New York
The Bronx/Queens The boroughs of The Bronx and
Queens Brooklyn The borough of Brooklyn
Manhattan The borough of Manhattan
Nassau County/Great Neck Nassau
Staten Island Richmond
Suffolk County Suffolk
White Plains City limits of White Plains

Pennsylvania
Hershey City limits of Hershey(June 1-September 15)
King of Prussia/Ft. Washington/ Montgomery
Bala Cynwyd
Philadelphia Philadelphia

Utah
Park City Summit(December 15-March 31)

Virginia
(For the cities of Alexandria, Fairfax, and Falls Church, and the counties ofArlington, Fairfax, and Loudoun, see District of Columbia)
Wintergreen Nelson

Washington
Seattle King

.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. 2002-63.

(1) The following localities (listed by key cities) have been added to the list of
high-cost localities: Naples, Florida; and Coeur d'Alene, Idaho.

(2) The portion of the year for which the following are high-cost localities (listed
by key city) has been changed: Santa Monica, California; and King of Prussia/Ft. Washington/Bala Cynwyd, Pennsylvania.

(3) The following localities have been removed from the list of high-cost
localities: San Mateo/Redwood City, California; Sunnyvale/Palo Alto/San Jose, California; Ogden/Layton/Davis County, Utah; Provo, Utah; and Salt Lake City, Utah.

(4) The borough of Brooklyn is now separately listed as a high-cost locality and is
no longer combined with the boroughs of The Bronx and Queens. .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 with respect to 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) With respect to an employee described in section 5.05(1) of this revenue
procedure, the payor may reimburse actual expenses or use the meals only per
diem 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.

.06 Transition rules. A payor who used the substantiation method of section 4.01
of Rev. Proc. 2002-63 for an employee during the first 10 months of calendar year
2003 may not use the High-Low Substantiation Method in section 5 of this
revenue procedure for that employee until January 1, 2004. A payor who used the
High-Low Substantiation Method of section 5 of Rev. Proc. 2002-63 for an
employee during the first 10 months of calendar year 2003 must continue to use
the High-Low Substantiation Method for the remainder of calendar year 2003 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. 2002-63, in lieu of the
updated rates and high-cost localities provided in section 5 of this revenue
procedure, for travel on or after November 1, 2003, and before January 1, 2004, if
those rates and localities are used consistently during this period for all employees
reimbursed under this method.

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 will be applied in the same
manner as applied under the Federal Travel Regulations, 41 C.F.R. Part 301-11
(2003nocljpmMoriarty John P2002 or 2003???), 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.

.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 meal and incidental expenses were or will
be incurred by the employee during each day of travel.

.04 Proration of the federal per diem or M&IE rate. Pursuant to 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, 4.04 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 the employee or
self-employed individual is traveling away from home in connection with the
performance of 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

(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 will
be treated as being in accordance with reasonable business practice (even though
only one and a half times the federal M&IE rate would be allowed under the
Federal Travel Regulations).

.05 Application of the appropriate 274(n) limitation on meal expenses. Except as
provided in section 6.05(4), 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 pursuant to section
4.03 of this revenue procedure, the taxpayer must treat such amount as an expense
for food and beverages.

(2) If a per diem allowance is paid only for meal and incidental expenses, the
payor must treat an amount equal to the lesser of the allowance or the federal
M&IE rate for the locality of travel for such 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, the
payor must treat an amount equal to the federal M&IE rate for the locality of
travel for each calendar day (or partial day) the employee is away from home as
an expense for food and beverages. For purposes of the preceding sentence, if a
per diem allowance for lodging, meal, and incidental expenses is paid at a rate
that is less than the federal per diem rate for the locality of travel for such day (or
partial day), the payor may treat an amount equal to 40 percent of such allowance
as the federal M&IE rate for the locality of travel for such day (or partial day).

(4) If an amount for incidental expenses is computed under section 4.05 of this
revenue procedure, none of the amount so computed is subject to limitation under
274(n) on the deductibility of food and beverage expenses.

.06 No double reimbursement or deduction. If a payor pays a per diem allowance in lieu
of reimbursing actual expenses for lodging, meal, and incidental expenses or for meal and
incidental expenses in accordance with section 4 or 5 of this revenue procedure, any
additional payment with respect to such expenses is treated as paid under a
nonaccountable plan, is included in the 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 or self-employed individual with respect to
such 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. 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 by the payor 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 will not apply in any
case in which 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) shall be 10
percent.

7. Application
.01 If the amount of travel expenses is deemed substantiated under the rules provided in
section 4 or 5 of this revenue procedure, and the employee actually substantiates to the
payor the elements of time, place, and business purpose of the travel for that day (or
partial day) in accordance with paragraphs (b)(2) and (c) (other than subparagraph
(2)(iii)(A) thereof) of 1.274-5, the employee is deemed to satisfy the adequate accounting
requirements of 1.274-5(f) as well as the requirement to substantiate by adequate records
or other sufficient evidence for purposes of 1.274-5(c). See 1.62-2(e)(1) for the rule that
an arrangement must require business expenses to be substantiated to the payor within a
reasonable period of time.

.02 An arrangement providing per diem allowances will be treated as satisfying the
requirement of 1.62-2(f)(2) with respect to returning amounts in excess of expenses if the
employee is required to return within a reasonable period of time (as defined in 1.62-
2(g)) any portion of such an allowance that relates to days of travel not substantiated,
even though the arrangement does not require the employee to return the portion of such
an 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 $200,
based on an anticipated 5 days of business travel at $40 per day to a locality for which the
federal M&IE rate is $34, and the employee substantiates 3 full days of business travel.
The requirement to return excess amounts will be 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 ($80), even
though the employee is not required to return the portion of the allowance ($18) that
exceeds the amount of the employee's expenses deemed substantiated under section 4.02
of this revenue procedure ($102) for the 3 substantiated days of travel. However, the $18
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 allowance in
accordance with section 7.01 of this revenue procedure. See 1.274-5(f)(2)(i). In addition,
such 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 1.274-5(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 the
employee's business expenses for travel away from home, the 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, includes on Form 2106, Employee Business Expenses, the deemed
substantiated portion of 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 1.274-5(f)(2)(iii). However, for purposes
of claiming this itemized deduction with respect to 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
provided in 274(n) and the 2-percent floor on miscellaneous itemized deductions
provided in 67.

.06 An employee who pays or incurs amounts for meal expenses and does not receive a
per diem allowance for meal and incidental expenses may deduct an amount computed
pursuant to 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 provided in 274(n) and the 2-percent floor on miscellaneous itemized
deductions provided 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
pursuant to 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 deductions
provided in 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 pursuant to
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 provided 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 pursuant
to section 4.05 of this revenue procedure in determining adjusted gross income under
62(a)(1).

.10 If a payor's reimbursement or other expense allowance arrangement evidences a
pattern of abuse of the rules of 62(c) and the regulations thereunder, all payments under
the arrangement will be treated as made under a nonaccountable plan. Thus, such
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).

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 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 the payor reimburses the expenses for
the days of travel substantiated. See 1.62-2(h)(2)(i)(B)(2).

.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 with respect to which the advance was paid are substantiated.
See 1.62-2(h)(2)(i)(B)(3 ). If some or all of the days of travel with respect to which the
advance was paid are not substantiated within a reasonable period of time and the
employee 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(3) 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(3) 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 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. 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 $100 and 4 days in a locality in which the federal per diem rate is $125.
The employer reimburses the employee $840 for the 6 days of travel away from home (2
x (120% x $100) + 4 x (120% x $125)), and does not require the employee to return the
excess payment of $140 (2 days x $20 ($120-$100) + 4 days x $25 ($150-$125)). For the
payroll period in which the employer reimburses the expenses, the employer must
withhold and pay employment taxes on $140. See section 8.02 of this revenue procedure.

9. Effect On Other Documents
Rev. Proc. 2002-63 is hereby superseded (except to the extent specified in sections
4.04(5) and 5.06 of this revenue procedure) for per diem allowances that are paid both (1)
to an employee on or after November 1, 2003, and (2) with respect to lodging, meal, and
incidental expenses or with respect to meal and incidental expenses paid or incurred for
travel away from home on or after November 1, 2003. Rev. Proc. 2002-63 is also hereby
superseded (except to the extent specified in section 4.04(5) of this revenue procedure)
for purposes of computing the amount allowable as a deduction for meal and incidental
expenses or for incidental expenses only paid or incurred by an employee or selfemployed
individual for travel away from home on or after November 1, 2003.

Drafting Information
The principal author of this revenue procedure is Sameera Hasannocljp and Moriarty, John
Pleasd Note change in author., of the Office of Associate Chief Counsel (Income Tax and
Accounting). For further information regarding this revenue procedure, contact Ms.
Hasan at (202) 622-4930 (not a toll-free call).