SECTION 1. PURPOSE
This revenue procedure updates Rev. Proc. 2003-80, 2003-45 I.R.B. 1037, 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 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 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.

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 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
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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 2004 and 2005, the deductible percentage for these
expenses is 70 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 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 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. Pursuant to this
grant of authority, the Commissioner may prescribe rules under which these
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 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, 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 do
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 the 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-
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5(g) or 1.274-5(j) will be 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 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 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 the employee's expenses deemed substantiated for the 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 3.02(1)(a), 4.04(6), and 5.06 of this revenue procedure provide
transition rules for the last 3 months of calendar year 2004.
.13 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.
.14 Sections 5.03 and 5.04 of this revenue procedure contain revisions to the list of
high-cost localities for purposes of section 5.
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SECTION 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 B
(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) 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 2004 for expenses of all CONUS travel
away from home that are paid or incurred during calendar year 2004 in lieu of the
updated GSA rates. A taxpayer must consistently use either these rates or the updated
rates for the period of October 1, 2004, through December 31, 2004.
(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).
(c) Internet access to the rates. The CONUS and OCONUS rates may be
found on the Internet at www.policyworks.gov/perdiem.
(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 Aincidental expenses@ has the same meaning
as in the Federal Travel Regulations, 41 C.F.R. 300-3.1 (2004). 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
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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 employersponsored
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. The 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).
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).
.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
meals 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
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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. This 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) 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.
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(3) 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(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.
(a) Example 1. Taxpayer, an employee in the transportation industry, travels
away from home on business 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(3) 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).
(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 $400 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 and excludable
from Taxpayer’s income is the full $400 because that amount does not exceed $410
(ten days away from home at $41 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 2004 to substantiate the amount of an individual's travel expenses under
sections 4.02 or 4.03 of Rev. Proc. 2003-80 may not use, for that individual, the special
transportation industry rates provided in this section 4.04 until January 1, 2005.
Similarly, a taxpayer who used the special transportation industry rates during the first 9
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months of calendar year 2004 to substantiate the amount of an individual's travel
expenses may not use, for that individual, the federal M&IE rates until January 1, 2005.
.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. This 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.
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 set forth 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 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 $199 for travel to any "highcost
locality" specified in section 5.03 of this revenue procedure, or $127 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 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.
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.03 High-cost localities. The following localities have a federal per diem rate of $163
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
Arizona
Phoenix/Scottsdale Maricopa
(January 1-May 31)
California
Monterey Monterey
(February 1-November 30)
Napa Napa
(May 1-October 31)
Palm Springs Riverside
(January 1-May 31)
San Diego San Diego
San Francisco San Francisco
Santa Barbara Santa Barbara
Santa Monica City limits of Santa Monica
South Lake Tahoe El Dorado
(December 1-August 31)
Colorado
Aspen Pitkin
Crested Butte City limits of Crested Butte
(December 1-March 31) (Gunnison County)
Silverthorne/Breckenridge Summit
Telluride San Miguel
(December 1-September 30)
Vail Eagle
District of Columbia
Washington D.C. (also the cities of Alexandria, Falls Church, and Fairfax, and the
counties of Arlington, Loudoun, and Fairfax, in Virginia; and the counties of
Montgomery and Prince George's in Maryland) (See also Maryland and Virginia)
Delaware
Lewes Sussex
(July 1-August 31)
Florida
Daytona Beach Volusia
(February 1-March 31)
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Fort Lauderdale Broward
(October 1-May 31)
Key West Monroe
Miami Miami-Dade
(October 1-May 31)
Naples Collier
(January 1-March 31)
Palm Beach Palm Beach (also the cities of
(October 1-May 31) Boca Raton, Delray Beach,
Jupiter, Palm Beach Gardens,
Palm Beach Shores, Singer
Island and West Palm Beach)
Illinois
Chicago Cook and Lake
Louisiana
New Orleans Orleans and St. Bernard
(September 1-April 30) Parishes
Maryland
(For the counties of Montgomery and Prince George=s, see District of Columbia)
Baltimore Baltimore
Cambridge/St. Michaels Dorchester and Talbot
(June 1-August 31)
Ocean City Worcester
(July 1-August 31)
Massachusetts
Boston Suffolk
Cambridge City limits of Cambridge
Hyannis Barnstable
(July 1-August 31)
Martha's Vineyard Dukes
(May 1-August 31)
Nantucket Nantucket
Michigan
Mackinac Island Mackinac
Nevada
Las Vegas Clark
(September 1-May 31)
New Jersey
Atlantic City Atlantic
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(May 1-October 31)
Cape May Cape May (except Ocean City)
(June 1-August 31)
Ocean City City limits of Ocean City
(June 1-October 31)
Princeton/Trenton Mercer
Tom’s River Ocean
(July 1-August 31)
New Mexico
Santa Fe Santa Fe
(July 1-August 31)
New York
Brooklyn/The Bronx/Queens/Staten Island Richmond and the boroughs
of Brooklyn, The Bronx, and
Queens
Carle Place/Garden City/Glen Cove/ Nassau
Great Neck/Plainview/Rockville
Centre/Syosset/Uniondale/Woodbury
Lake Placid Essex
(July 1-August 31)
Manhattan The borough of Manhattan
Riverhead/Ronkonkoma/Melville Suffolk
Tarrytown Westchester (except White
Plains)
White Plains City limits of White Plains
North Carolina
Kill Devil Dare
(April 1-October 31)
Pennsylvania
Hershey City limits of Hershey
(May 1-August 31)
Philadelphia Philadelphia
Rhode Island
Jamestown/Middletown/Newport Newport
(May 1-October 31)
Providence Providence
South Carolina
Hilton Head Beaufort
(April 1-October 31)
Myrtle Beach Horry
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(June 1-August 31)
Utah
Park City Summit
(December 1-March 31)
Virginia
(For the cities of Alexandria, Fairfax, and Falls Church, and the counties of Arlington,
Fairfax, and Loudoun, see District of Columbia)
Virginia Beach Cities of Virginia Beach, Norfolk,
(June 1-August 31) Portsmouth, Chesapeake, and
Suffolk
Washington
Seattle King
(May 1-October 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. 2003-80 (changes listed by key cities).
(1) The following localities have been added to the list of high-cost localities:
Cambridge/St. Michaels, Maryland; Crested Butte, Colorado; Daytona Beach, Florida;
Fort Lauderdale, Florida; Hilton Head, South Carolina; Hyannis, Massachusetts;
Jamestown/Middletown/Newport, Rhode Island; Kill Devil, North Carolina; Lake Placid,
New York; Las Vegas, Nevada; Lewes, Delaware; Miami, Florida; Monterey, California;
Myrtle Beach, South Carolina; Palm Beach, Florida; Phoenix/Scottsdale, Arizona;
Providence, Rhode Island; San Diego, California; Santa Barbara, California; Santa Fe,
New Mexico; South Lake Tahoe, California; Tarrytown, New York; Tom’s River, New
Jersey; and Virginia Beach, Virginia.
(2) The portion of the year for which the following are high-cost localities has
been changed: Aspen, Colorado; Atlantic City, New Jersey; Cape May, New Jersey;
Hershey, Pennsylvania; Key West, Florida; Martha's Vineyard, Massachusetts;
Nantucket, Massachusetts; Napa, California; Naples, Florida; New Orleans, Louisiana;
Ocean City, Maryland; Ocean City, New Jersey; Park City, Utah; Seattle, Washington;
Telluride, Colorado; and Vail, Colorado.
(3) The following localities have been removed from the list of high-cost localities:
Big Sky, Montana; Coeur d’Alene, Idaho; Edison, New Jersey;
Kennebunk/Kittery/Sanford, Maine; King of Prussia/Ft. Washington/Bala Cynwyd,
Pennsylvania; Newark, New Jersey; Piscataway/Belle Mead, New Jersey; Stateline,
Nevada; Sun Valley, Idaho; Tahoe City, California; Traverse City, Michigan; and
Wintergreen, Virginia.
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(4) The boroughs of Brooklyn and Staten Island are no longer separately listed
as high-cost localities and are now 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. 2003-80 for an employee during the first 9 months of calendar year 2004
may not use the high-low substantiation method in section 5 of this revenue procedure
for that employee until January 1, 2005. A payor who used the high-low substantiation
method of section 5 of Rev. Proc. 2003-80 for an employee during the first 9 months of
calendar year 2004 must continue to use the high-low substantiation method for the
remainder of calendar year 2004 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.
2003-80, 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, 2004, and before January 1, 2005, 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 will be applied in the
same manner as applied under the Federal Travel Regulations, 41 C.F.R. Part 301-11
(2004), 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,
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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 selfemployed
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 that 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 each day (or partial day, see section 6.04 of this revenue
procedure) as an expense for food and beverages.
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(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 each day (or partial day), the payor may treat
an amount equal to 40 percent of the allowance as the federal M&IE rate for the locality
of travel for each 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 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 those 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, “Wage and Tax Statement,” 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 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.
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 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) shall be 10 percent.
SECTION 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 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
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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.
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.02 An arrangement providing per diem allowances will be treated as satisfying the
requirement of ' 1.62-2(f)(2) of 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 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 $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 $31, 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 ($27) that exceeds the amount of the employee's expenses deemed
substantiated under section 4.02 of this revenue procedure ($93) for the 3 substantiated
days of travel. However, the $27 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, 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 ' 1.274-5(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
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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. See
§ 1.62-2(k). 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 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(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
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.
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SECTION 9. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2003-80 is superseded (except to the extent specified in sections 3.02(1),
4.04(6), and 5.06 of this revenue procedure) for per diem allowances that are paid both
(1) to an employee on or after October 1, 2004, 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 October 1, 2004. Rev. Proc. 2003-80 is
also superseded (except to the extent specified in sections 3.02(1) and 4.04(6) 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 self-employed individual for travel away from home on or after October 1,
2004.

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