IRS Announces Increased Per Diem Rates for Business Travel, Effective October 1

WASHINGTON — The Internal Revenue Service (IRS) has officially released its annual inflation adjustments and updates regarding the special per diem rates that employers and business taxpayers use to substantiate business travel and incidental expenses. Detailed under Notice 2026-60, these updated rates provide significant relief and administrative simplification for companies utilizing the per diem substantiation method outlined in Rev. Proc. 2019-48.

The revised figures, which take effect on October 1, apply to lodging, meals, and incidental expenses (M&IE) incurred during business travel within the continental United States (CONUS), as well as specific industry-tailored rates. As inflation continues to impact the cost of lodging, dining, and logistics across the country, these upward adjustments ensure that businesses can accurately reflect economic realities when compensating traveling personnel without needing to track every individual receipt.

Main Facts

The foundational mechanics of the per diem substantiation method remain anchored in established tax law. Generally, when an employer or third-party payer provides a per diem allowance to an employee in lieu of tracking and reimbursing actual itemized expenses for lodging, meals, and incidental expenses, the amount treated as substantiated for any given calendar day is capped. Specifically, it is the lesser of the actual allowance paid or the applicable federal per diem rate set for the specific locality within CONUS.

Under the newly issued Notice 2026-60, several key changes take effect starting October 1:

• High-Low Substantiation Method Rates: The simplified "high-low" method—which streamlines reporting by applying a flat rate to pre-designated high-cost areas and a separate flat rate to all other locations—is seeing increases across the board.
• High-Cost Locality Rate: The per diem rate for travel to designated high-cost localities within CONUS increases to $329, up from $319 in the previous period.
• Non-High-Cost Locality Rate: The rate for all other localities within CONUS rises to $230, up from $225.
• Meals-Only Portions: The portion of the per diem rate treated as payment specifically for meals (critical for calculating the business deduction limitations under Internal Revenue Code Section 274(n)) remains steady at $86 for high-cost localities and $74 for all other CONUS localities.
• Transportation Industry Rates: Special industry-specific allowances for workers in the transportation sector remain unchanged. The M&IE rate is $80 for travel within CONUS and $86 for travel outside CONUS (OCONUS), while the flat rate for incidental expenses remains $5 per day universally.

Chronology of the Policy and Annual Update Cycle

Understanding how the per diem system operates requires looking at the regulatory timeline established by the Treasury Department and the IRS.

• The Foundation (Rev. Proc. 2019-48): For years, the IRS has utilized Revenue Procedure 2019-48 as the master framework governing per diem substantiation rules. This revenue procedure outlines how employers can make per diem payments without treating those payments as taxable wages, provided they fall within federal limits and comply with strict accountability rules regarding business connection, substantiation, and the return of excess amounts.
• The Federal Fiscal Year Alignment: Unlike many tax provisions that track the standard calendar year (January 1 through December 31), per diem rates historically operate on a federal fiscal year cycle, beginning on October 1 and running through September 30 of the following year. This alignment mirrors the General Services Administration (GSA) updates for federal employee travel allowances.
• The Notice Release (Late Summer 2026): In alignment with annual administrative procedures, the IRS published Notice 2026-60 in the late third quarter of 2026, previewing the adjustments ahead of the fast-approaching October 1 effective date. This window gives corporate accounting departments, payroll software providers, and human resources teams adequate time to update their internal travel and expense (T&E) reporting systems.
• Effective Date (October 1, 2026 – September 30, 2027): The newly codified rates under Notice 2026-60 officially govern all business travel substantiation for the twelve-month period ending September 30, 2027. Concurrently, the IRS updated its official geographic designations, adjusting which specific counties and metropolitan statistical areas qualify for the "high-cost" label based on shifting economic data and real estate trends.

Supporting Data and Breakdown of Rates

To fully comprehend the financial impact of Notice 2026-60, tax professionals and corporate controllers must examine the granular data points governing CONUS travel, the high-low threshold definitions, and transportation sector exceptions.

The High-Low Threshold Definition

For a locality to be classified as a "high-cost area" for the upcoming twelve-month cycle, its federal per diem rate must reach or exceed $280. The IRS periodically reviews real estate and hospitality costs across metropolitan areas to add, retain, or drop cities from this list.

Comparative Rate Table (CONUS High-Low Method)

Transportation Industry Special Rules

Workers in the transportation industry—such as long-haul truck drivers, airline personnel, and railway workers—face unique challenges regarding continuous travel. Because these workers frequently cross multiple jurisdictions within a single week, the IRS permits a simplified substantiation model.

• M&IE CONUS: Unchanged at $80 per day.
• M&IE OCONUS: Unchanged at $86 per day.
• Incidental Expenses Only: Unchanged at $5 per day, applicable to both domestic and international travel.

Taxpayers electing to use these transportation-specific rates must still ensure that they meet all eligibility criteria outlined in Rev. Proc. 2019-48, meaning the employee must be directly employed in an industry that routinely requires travel away from home, and the employee’s duties must regularly require them to sleep away from home.

Official Responses and Administrative Guidance

While the publication of an IRS notice is a routine administrative function, tax practitioners, corporate compliance officers, and payroll associations monitor these releases closely to prevent compliance errors.

The Burden of Substantiation

Tax administration experts emphasize that utilizing per diem rates does not completely absolve employers and employees from recordkeeping requirements. Under Treasury Regulations, while the amount of the expense is deemed substantiated by using the federal rates, the taxpayer must still substantiate the time, place, and business purpose of the travel.

A corporate tax attorney specializing in employer-provided fringe benefits noted:

"The per diem method is a massive administrative relief for accounting departments, but companies often make the mistake of thinking it’s a blank check. You still need to prove that the employee was traveling for a bona fide business reason, on specific dates, and to the designated locations. Miss the time-and-place documentation, and the IRS can disallow the deduction even if the dollar amount matches the per diem limit."

Integration with Accounting Software

Payroll and ERP software vendors—such as SAP Concur, Workday, and Oracle—typically build these updates directly into their automated expense modules ahead of the October 1 deadline. Employers are urged to verify that their corporate configurations have been updated to reflect the $329 high-cost cap and the $230 non-high-cost baseline to avoid improper reimbursements that could trigger tax complications during an audit.

Implications for Businesses and Traveling Employees

The rollout of Notice 2026-60 carries multiple practical, financial, and tax-related consequences for corporate America and self-employed professionals alike.

1. Budgeting and Corporate T&E Policies

With the high-cost rate climbing from $319 to $329 and standard rates rising by $5, corporate travel managers must review their internal travel policies. If a company’s internal per diem policy is pegged directly to the federal rate, travel budgets will automatically absorb a modest cost increase. Conversely, if a company sets its internal rates below the federal maximum, employees traveling to high-cost metropolitan hubs may absorb out-of-pocket costs unless corporate adjustments are made.

2. Tax Deductibility and Section 274(n) Limitations

Employers must remain mindful of the strict limits placed on the deductibility of business meals. Under Internal Revenue Code Section 274(n), businesses are generally limited to deducting only 50% of the cost of business meals. When utilizing per diem rates, the portion of the allowance allocated specifically to meals (the $86 or $74 figures cited in Notice 2026-60) must be isolated for the 50% disallowance calculation, while the lodging portion remains 100% deductible as an ordinary and necessary business expense.

3. Impact on Self-Employed Individuals (Schedule C Filers)

While employees rely on employer-provided reimbursement plans, self-employed individuals (sole proprietors, independent contractors, and single-member LLC owners filing Schedule C) can also utilize the M&IE per diem rates to substantiate business travel meals without saving every restaurant receipt. However, self-employed taxpayers generally cannot use the federal lodging per diem rates; instead, they must deduct actual, documented lodging expenses. Therefore, the stability of the M&IE rates ($80 CONUS / $86 OCONUS for transportation workers, and standard rates for general business travelers) remains a vital planning tool for independent contractors navigating tax season.

4. Avoiding Taxable Wages

If an employer reimburses an employee for travel expenses using a per diem rate that exceeds the applicable federal per diem rate, the excess amount is considered paid under a "nonaccountable plan." Under IRS rules, nonaccountable plan distributions must be treated as taxable wages, subject to income tax withholding, Social Security, and Medicare taxes. Therefore, updating payroll systems to reflect the new $329 and $230 thresholds as of October 1 is critical to ensuring that higher allowances do not inadvertently trigger unwanted payroll tax liabilities.

Conclusion

Notice 2026-60 serves as a necessary annual recalibration of federal travel substantiation rules, aligning tax compliance parameters with contemporary economic conditions. By raising the high-cost CONUS threshold to $329 and standardizing rules for the upcoming fiscal year, the IRS continues to reduce the compliance burden for businesses managing mobile workforces.

Employers, payroll administrators, and self-employed taxpayers are advised to audit their internal expense-reporting frameworks ahead of the October 1 effective date to ensure seamless compliance and optimize their tax deductions for the 2026–2027 travel cycle.

To comment on this article or to suggest an idea for future tax and accounting coverage, contact Martha Waggoner at [email protected].