Each fall, the IRS updates its special per diem rates for business travel. Companies that miss the changes can end up applying outdated rates once the year-end transition period ends, creating problems substantiating deductions. The 2026-2027 update is a good reason to check your rates and review how your travel expense program works.
The IRS released Notice 2026-60 on September 24, announcing rates for October 1, 2026, through September 30, 2027. Under the high-low substantiation method, the daily rate for high-cost localities rises from $319 to $329, and the rate for other continental U.S. locations increases from $225 to $230. An extra $10 or $5 a day adds up for businesses whose employees travel frequently, especially to high-cost destinations, affecting both reimbursement costs and tax deductions.
How per diem works
Per diem rates are fixed daily allowances for lodging, meals, and incidental expenses when employees travel away from home on business. They reduce the need to track individual receipts while satisfying the substantiation requirements under Section 274(d) of the Internal Revenue Code.
Employers generally choose between two methods. The standard federal per diem method uses location-specific rates published by the General Services Administration (GSA). The high-low substantiation method, popular among private-sector employers, uses one rate for IRS-designated high-cost localities and another for all other continental U.S. locations. Businesses may also reimburse actual expenses if employees keep adequate records. Per diem is optional, but for most organizations it reduces paperwork, makes costs more predictable, and helps support reimbursements during an audit.
What changed for 2026-2027
Although the total high-low rates increase to $329 and $230, the meals and incidental expenses (M&IE) portions remain at $86 for high-cost localities and $74 for other continental U.S. localities. These amounts matter when applying the meals deduction limitation under Section 274(n). Because the M&IE portions are unchanged, the increases fall entirely on lodging, reflecting continued growth in hotel costs.
The transportation industry’s special M&IE rates also remain unchanged: $80 for travel within the continental United States and $86 for travel outside it. These rates apply to employees and self-employed individuals in transportation roles whose work regularly requires travel to localities with differing federal M&IE rates. The incidental expenses-only deduction rate stays at $5 per day for travel both within and outside the continental United States.
The high-cost locality list has also changed. Four locations join the list for 2026-2027, though only one qualifies year-round:
- Tucson, Arizona (January 1 – March 31)
- San Mateo/Foster City/Belmont, California (year-round)
- Albuquerque, New Mexico (October 1 – March 31)
- Cody, Wyoming (June 1 – September 30)
Outside those periods, travel to these locations uses the $230 rate. Panama City, Florida, has been removed from the list. Fifteen localities also have changes to the months in which they qualify as high-cost, including Aspen, Colorado; New York City; Philadelphia; and Hilton Head, South Carolina. If your employees travel to these areas, verify the qualifying dates and destination carefully.
Does your reimbursement policy still fit your business?
Updating the rates is also a chance to revisit the method you use. If most employee travel is concentrated in a few markets, the federal method may offer more precise and favorable reimbursement amounts. If employees travel throughout the country, the high-low method is usually easier to manage. Keep in mind that this choice cannot be freely switched mid-year: an employer that uses the high-low method for an employee must generally use it for all of that employee’s continental U.S. travel for the rest of the calendar year.
CFOs and controllers should compare reimbursement rates against applicable IRS limits. Amounts paid above the per diem limit that employees don’t substantiate or return are taxable wages, creating additional payroll tax obligations. Paying too little can affect morale and retention, particularly as business travel has rebounded and costs in high-cost cities continue to rise.
Administration matters as well. A per diem program provides its intended substantiation benefits only when the business applies the correct rate to the correct locality and travel dates. Employees still need to document the time, place, and business purpose of their travel. Missing records or inconsistent application may lead the IRS to treat reimbursements as ordinary income, exposing the business to penalties and back taxes.
What finance teams should review now
The new rate period began October 1. Start with your expense management system and policy documentation: update the high-low rates to $329 and $230, and confirm the system reflects the high-cost locality list in Notice 2026-60. Pay particular attention to newly added locations and changes in qualifying months, which are common sources of errors during the transition.
Next, notify employees and managers who submit or approve expense reports. Travelers heading to Tucson, Albuquerque, or Cody during those cities’ high-cost months, or to San Mateo at any time, may see different allowances. Clear instructions prevent reimbursement disputes and save time for everyone handling reports.
Finally, review the transition provisions under Rev. Proc. 2019-48 for October 1 through December 31, 2026. An employer that used the high-low method for an employee earlier in 2026 must continue using it for that employee through December 31. For those last three months, the employer may apply either the prior year’s rates and locality list or the new ones, as long as the choice is applied consistently.
Make annual updates easier
Build enough flexibility into your policy to adjust rates each year without rewriting the entire program. That means reviewing your expense software, policy documentation, and employee training regularly. The IRS revises its high-cost locality list annually, and the rules are unlikely to simplify. Clear processes that staff can follow and update will make future changes easier to manage.
Whether you have a few traveling employees or manage travel across many cities, check how your business is handling the new rate period. Please reach out to a Saville team member for more information.