Green light high-low per diem rates

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in Small Business Tax,Small Business Tax Deduction Strategies

The IRS has caved in. After announcing it intended to eliminate the popular “high-low” per diem rates for business travel, it succumbed to public pressure. Result: Employers can still use the high-low rates for the government’s 2012 fiscal year (Oct. 1, 2011, through Sept. 30, 2012).

Strategy: Take advantage of the higher per diem rates for 2012. The IRS bumped up the per diem rate for high-cost areas to $242, an increase of $9 from 2011. The rate for low-cost areas rose by $3 to $163. (IRS Notice 2011-81)

Although the new 2012 rates are allowed as of Oct. 1, 2011, employers could continue to use the 2011 rates for the rest of that year and then begin using the new rates on Jan. 1, 2012.

Here’s the whole story: Every year, the General Services Administration (GSA) establishes per diem rates for government employees in the 48 states in the continental United States and the District of Columbia (the “CONUS” rates); in areas outside the continental United States (Hawaii, Puerto Rico and U.S. possessions (the “OCONUS” rates); and in foreign countries. The IRS says that private employers can use these rates as a record-keeping shortcut.

In addition to the standard rates for specific destinations, the GSA sets rates for specified “high-cost” areas. The agency treats all other destinations as “low-cost” areas under this simplified alternative.

A few high-cost areas were cut from last year’s list, but no new ones were added. Also, the time frame, for which the high-cost area rate is available, has been modified for certain locations. 

Different strokes for different folks

Although many employers know about the different per diems for high-cost and low-cost areas, they generally aren’t aware of the following nifty tax maneuver.

Strategy: Mix and match per diems for your employees. There’s no tax rule that says you must use the same method for all employees.

For example, to reduce paperwork you might use the high-low per diem method for employees who travel extensively on business, especially if they usually go to major cities. Other employees can use the actual expense method if they travel frequently to low-cost areas. Plus, you can require employees who don’t travel frequently to use this method.

Tip: You can’t use per diem rates if you’re self-employed or own more than 10% of the company. In that case, you must base your deductions on actual expenses and back them up with all the records normally required for business travel deductions.

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