The IRS just announced changes to the per diem rates that freelancers and other taxpayers use to substantiate the amount of ordinary and necessary business expenses they can claim while traveling away from home. This means that under the new per diem rates, the per diem substantiation method will yield higher amounts. The changes went into effect starting Oct. 1, 2023.
Here’s how the per diem rules work for freelance business travel according to IRS guidance:
Under the per diem substantiation method, if you pay a per diem allowance in lieu of reimbursing an employee’s actual expenses for lodging, meals, and incidental expenses, the amount substantiated for each calendar day is identified as the lesser of: 1) the allowance amount for that day or 2) the amount calculated under current federal per diem rates for the place of travel within the continental United States (CONUS).
Keep in mind that a separate federal rate applies to per diem allowances just for meals and incidental expenses. If you are using the rates and the list of localities provided by the IRS, you must also comply with those rules for the per diem substantiation method.
This location-based, high-low substantiation method applies a higher rate to designated high-cost localities and a lower rate to all other localities. Today, the rates are as follows:
- $309 for travel to any high-cost locality and $214 for travel to any other locality within the continental U.S. The amount of the $309 high rate and $214 low rate that is treated as paid for meals is $74 for travel to any high-cost locale and $64 for travel to any other locality within CONUS.
- Under the meal and incidental expenses-only substantiation method, per diem rates are $74 for travel to any high-cost locality and $64 for travel to any other locality within the CONUS.
The IRS has also revised the list of high-cost localities for the upcoming new annual period (Oct. 1, 2023, to Sept. 30, 2024) for which the new rates are in effect. High-cost localities have a federal per-diem rate of at least $261 per day. It is important that you check this per diem per locality listing as well, especially if you have used these rates in the past because changes do occur. For example, Los Angeles, Calif., and Portland, Ore., have been removed from the list of high-cost localities as of October 1, 2023.
There are also special per diem rates for taxpayers in the transportation industry including meals and incidental expense rates of $69 for any locality of travel within CONUS and $74 for localities of travel outside CONUS, these remain same as the current per diem rates. The rate for incidental expenses remains $5 per day, for travel in and outside CONUS.
It is critical to make sure that you track all of your expenses as a freelancer and freelance business owner so that your records are accurate and you reduce the risk of an audit. If you have questions in regard to per diem rates for freelance businesses, please contact a qualified tax professional who specializes in taxes for the self-employed.
.Jonathan Medows is a NYC-based CPA who specializes in taxes for consultants across the country. His website has a resource section with how-to articles and information for freelancers. https://www.cpaforfreelancers.com/