Pevita Pearce
Beginning October 1, 2026, taxpayers will see adjustments to the per diem rates used for calculating tax deductions for business travel expenses. The Internal Revenue Service (IRS) has announced these updated rates, which will offer $329 per day for travel to high-cost locations and $230 per day for travel to low-cost areas within the continental United States (CONUS). These figures represent an increase of $10 and $5, respectively, from the previous year’s rates. These annual announcements are a critical component of how the IRS provides guidance on substantiating business travel expenses, encompassing lodging, meals, and incidental expenses.
The official notification of these changes comes through IRS Notice 2026-60, published on September 24, 2026. This notice not only details the standard per diem rates but also provides specific guidance for different categories of business travelers. It includes special per diem rates for the transportation industry, focusing solely on meals and incidental expenses (M&IE). Additionally, it outlines the rate for an incidental expenses-only deduction and revises the list of high-cost localities for those utilizing the high-low substantiation method. This annual update ensures that the figures used for tax deductions remain relevant to current economic conditions and the cost of travel.
It is important to note that the IRS emphasizes that the use of a per diem substantiation method is not obligatory. Taxpayers retain the option to meticulously track and substantiate their actual allowable expenses, provided they maintain comprehensive and adequate records, or possess other sufficient evidence to support their claims. This flexibility allows individuals and businesses to choose the method that best suits their record-keeping capabilities and financial circumstances.
Understanding the Per Diem Substantiation Method
The per diem, or "per day," system allows businesses and employees to deduct a predetermined daily amount for lodging, meals, and incidental expenses incurred while traveling away from home for business purposes. This system simplifies the expense reporting process by eliminating the need to collect and submit individual receipts for every meal or minor expense. Instead, taxpayers can use the IRS-published rates to claim their deductions, streamlining administrative burdens for both the traveler and the accounting department.
The IRS establishes these rates based on an analysis of regional cost variations. The "high-low" method, a key component of this system, categorizes geographic areas into high-cost and low-cost locations. This approach aims to reflect the differing expenses associated with travel in more expensive urban centers compared to less costly rural or suburban areas. The annual adjustment of these rates is crucial to ensuring their accuracy and fairness.
Specialized Rates for the Transportation Industry
For individuals within the transportation industry, the IRS has established distinct per diem rates specifically for meals and incidental expenses. These rates are designed to accommodate the unique travel patterns and demands of professions such as pilots, truck drivers, train engineers, and merchant mariners. For the period commencing October 1, 2026, these special M&IE rates remain unchanged from the previous year. Travelers within the continental United States (CONUS) will continue to receive a per diem of $80 per day. For travel outside of CONUS, the rate is set at $86 per day.
A transportation industry worker is formally defined by the IRS as "an employee or self-employed individual whose work is of the type that directly involves moving people or goods by airplane, barge, bus, ship, train, or truck, and regularly requires travel away from home." This definition underscores the critical role these individuals play in the nation’s commerce and the necessity of providing them with appropriate tax relief for their travel-related costs. The consistency of these M&IE rates for this sector reflects a stable assessment of their day-to-day travel expenses.
Incidental Expenses-Only Deduction Rate
Beyond lodging and meals, business travel often incurs a range of minor, out-of-pocket costs. These are categorized as incidental expenses. For the fiscal year beginning October 1, 2026, the IRS has maintained the rate for the incidental expenses-only deduction at $5 per day. This rate applies regardless of whether the travel is within CONUS or outside of CONUS.
Incidental expenses are defined as specific, minor costs incurred during business travel that are separate from the larger expenditures of lodging and meals. According to IRS Publication 463, "Travel, Gift, and Car Expenses," these costs explicitly include fees and tips paid to individuals such as porters, baggage carriers, hotel staff, and crew members on ships. While seemingly small, these daily expenses can accumulate, and the $5 per diem allowance provides a simplified way for travelers to account for them without needing to document each individual tip.
High-Low Substantiation Method: A Closer Look
The high-low substantiation method offers a simplified approach for many businesses and employees by reducing the number of per diem rates they need to track. Under this method, the IRS designates certain geographic areas as "high-cost" localities, which are subject to a higher per diem rate, while all other locations within CONUS fall under the "low-cost" rate.
For the period of October 1, 2026, to September 30, 2027, the per diem rate for travel to any high-cost locality within CONUS has been set at $329 per day. Conversely, the rate for travel to any other location within CONUS, considered a low-cost area, is $230 per day. This represents a significant increase for those traveling to major metropolitan areas or other regions identified by the IRS as having elevated living and accommodation costs.
Furthermore, Notice 2026-60 also specifies the portion of these rates that is treated as being paid for meals under Section 274(n) of the Internal Revenue Code. For travel to high-cost localities within CONUS, the meal portion remains at $86. For travel to other localities within CONUS, the meal portion is $74. These meal allowances are subject to specific limitations, particularly regarding the deductibility of business meals.
The IRS also publishes an updated list of high-cost localities in conjunction with Notice 2026-60. To qualify as a high-cost locality for purposes of this method, a location must have a federal per diem rate of $280 or more. This list is subject to review and updates as economic conditions and cost of living in various regions change.
Background and Regulatory Framework
The system of per diem rates for business travel expenses is rooted in federal regulations designed to simplify tax compliance for individuals and businesses. Revenue Procedure 2019-48 provides the foundational rules for taxpayers who choose to use per diem rates instead of tracking actual expenses. This revenue procedure allows taxpayers to substantiate their travel expenses using the federal per diem rates that are published annually by the General Services Administration (GSA) and, by extension, the IRS.
The GSA, responsible for managing federal government operations, plays a key role in determining these rates. Their data collection and analysis inform the IRS’s decisions on the annual per diem figures. This collaborative process ensures that the rates are based on current market conditions and are reflective of the costs incurred by government employees, which often serve as a benchmark for private sector travel expense policies.
Rev. Proc. 2019-48 specifically permits certain taxpayers to utilize the special transportation industry rate or the high-low substantiation method for travel to designated high-cost localities. The IRS’s annual notice, such as Notice 2026-60, serves as the official vehicle for communicating these updated rates and the list of high-cost localities to the public. This consistent annual update mechanism provides a predictable framework for tax planning and expense management.
Implications and Broader Context
The adjustments to the per diem rates for fiscal year 2027 have several implications for businesses and individual taxpayers. The increased rates for high-cost locations acknowledge the persistent rise in lodging and meal costs in many major urban centers and popular business destinations. For companies that reimburse employees based on these federal rates, this means a potential increase in travel budgets or a need to adjust their internal reimbursement policies to align with the updated IRS guidelines.
For employees who are reimbursed by their employers, the per diem method can simplify their expense reporting. For those who are not fully reimbursed and are seeking to deduct unreimbursed business expenses, these higher rates can lead to larger deductions, potentially reducing their overall tax liability. However, it is crucial for taxpayers to understand the rules surrounding these deductions, including the requirement to travel away from home and the substantiation of the business purpose of the travel.
The distinction between high-cost and low-cost areas highlights the significant regional disparities in the cost of living and doing business. The IRS’s designation of high-cost localities is a direct reflection of these economic realities. Businesses operating in or traveling to these areas will experience the most notable impact from the updated rates.
The continued provision of special rates for the transportation industry underscores the government’s recognition of the unique challenges faced by these mobile workers. The stable M&IE rates for this sector suggest that the IRS has not identified significant shifts in the cost of daily sustenance for these professionals that would warrant an adjustment at this time.
The fact that the per diem method is optional remains a critical point. Taxpayers who are meticulous record-keepers and can demonstrate actual expenses that are lower than the per diem rates might find it more advantageous to deduct their actual costs. Conversely, for those who find it burdensome to track every small expense, the per diem method offers a welcome simplification. The IRS’s commitment to providing these different substantiation methods demonstrates an effort to accommodate a wide range of taxpayer circumstances and preferences.
Looking Ahead
The annual announcement of per diem rates by the IRS serves as a crucial piece of information for financial planning and tax preparation. As businesses and individuals prepare for the upcoming fiscal year, understanding these updated rates is essential for accurate expense management and tax deduction calculations. The IRS encourages taxpayers to consult IRS Notice 2026-60 and related publications for the most comprehensive and detailed information. The agency also reminds taxpayers that staying informed about tax law changes and guidance is vital for maintaining compliance and maximizing legitimate tax benefits. The consistent cycle of these updates ensures that the tax system remains responsive, albeit with a lag, to the evolving economic landscape of business travel.
