SECTION 5. HIGH-LOW

SUBSTANTIATION METHOD

.01 In general . If a payor pays a per diem allowance in lieu of reimbursing ac

tual lodging, meal, and incidental expenses incurred or to be incurred by an employee for travel away from home and the payor uses the high-low substantiation method described in this section 5 for travel within CONUS, the amount of the expenses that is deemed substantiated for each calendar day is equal to the lesser of the per diem allowance for that day or the amount computed at the rate set forth in section 5.02 of this revenue procedure for the locality of travel for that day (or partial day, see section 6.04 of this revenue procedure). Except as provided in section 5.06 of this revenue procedure, this high-low substantiation method may be used in lieu of the per diem substantiation method provided in section 4.01 of this revenue procedure, but may not be used in lieu of the meals only substantiation method provided in section 4.02 or 4.03 of this revenue procedure.

.02 Specific high-low rates . Except as provided in section 5.06 of this revenue procedure, the per diem rate set forth in this section 5.02 is $199 for travel to any “highcost locality” specified in section 5.03 of

Key City County or other defined location

Arizona

Phoenix/Scottsdale Maricopa (January 1-May 31)

California

Monterey Monterey (February 1-November 30) Napa Napa (May 1-October 31) Palm Springs Riverside (January 1-May 31) San Diego San Diego San Francisco San Francisco Santa Barbara Santa Barbara Santa Monica City limits of Santa Monica South Lake Tahoe El Dorado (December 1-August 31)

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Key City County or other defined location

Colorado

Aspen Pitkin Crested Butte City limits of Crested Butte (December 1-March 31) (Gunnison County) Silverthorne/Breckenridge Summit Telluride San Miguel (December 1-September 30) Vail Eagle

District of Columbia

Washington D.C. (also the cities of Alexandria, Falls Church, and Fairfax, and the counties of Arlington, Loudoun, and Fairfax, in Virginia; and the counties of Montgomery and Prince George’s in Maryland) (See also Maryland and Virginia)

Delaware

Lewes Sussex (July 1-August 31)

Florida

Daytona Beach Volusia (February 1-March 31) Fort Lauderdale Broward (October 1-May 31) Key West Monroe Miami Miami-Dade (October 1-May 31) Naples Collier (January 1-March 31) Palm Beach Palm

(October 1-May 31)

Palm Beach (also the cities of Boca Raton, Delray Beach, Jupiter, Palm Beach Gardens, Palm Beach Shores, Singer Island and West Palm Beach)

Illinois

Chicago Cook and Lake

Louisiana

New Orleans Orleans and St. Bernard (September 1-April 30) Parishes

Maryland

(For the counties of Montgomery and Prince George’s, see District of Columbia) Baltimore Baltimore Cambridge/St. Michaels Dorchester and Talbot (June 1-August 31) Ocean City Worcester (July 1-August 31)

Massachusetts

Boston Suffolk Cambridge City limits of Cambridge

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Key City County or other defined location

Hyannis Barnstable (July 1-August 31) Martha’s Vineyard Dukes (May 1-August 31) Nantucket Nantucket

Michigan

Mackinac Island Mackinac

Nevada

Las Vegas Clark (September 1-May 31)

New Jersey

Atlantic City Atlantic (May 1-October 31) Cape May Cape May (except Ocean City) (June 1-August 31) Ocean City City limits of Ocean City (June 1-October 31) Princeton/Trenton Mercer Tom’s River Ocean (July 1-August 31)

New Mexico

Santa Fe Santa Fe (July 1-August 31)

New York

Brooklyn/The Bronx/Queens/Staten Island Richmond and the boroughs of Brooklyn, The Bronx, and Queens Carle Place/Garden City/Glen Cove/ Nassau Great Neck/Plainview/Rockville Centre/Syosset/Uniondale/Woodbury Lake Placid Essex (July 1-August 31) Manhattan The borough of Manhattan Riverhead/Ronkonkoma/Melville Suffolk Tarrytown Westchester (except White Plains) White Plains City limits of White Plains

North Carolina

Kill Devil Dare (April 1-October 31)

Pennsylvania

Hershey City limits of Hershey (May 1-August 31) Philadelphia Philadelphia

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Key City County or other defined location

Rhode Island

Jamestown/Middletown/Newport Newport (May 1-October 31) Providence Providence

South Carolina

Hilton Head Beaufort (April 1-October 31) Myrtle Beach Horry (June 1-August 31)

Utah

Park City Summit (December 1-March 31)

Virginia (For the cities of Alexandria, Fairfax, and Falls Church, and the counties of Arlington, Fairfax, and Loudoun, see District of Columbia)

Virginia Beach

(June 1-August 31)

Washington

Cities of Virginia Beach, Norfolk, Portsmouth, Chesapeake, and Suffolk

Seattle King (May 1-October 31)

payor that uses the high-low substantiation method with respect to an employee must use that method for all amounts paid to that employee for travel away from home within CONUS during the calendar year. See section 5.06 of this revenue procedure for transition rules.

(2) With respect to an employee described in section 5.05(1) of this revenue procedure, the payor may reimburse actual expenses or use the meals only per diem method described in section 4.02 of this revenue procedure for any travel away from home, and may use the per diem substantiation method described in section 4.01 of this revenue procedure for any OCONUS travel away from home.

.06 Transition rules . A payor who used the substantiation method of section 4.01 of Rev. Proc. 2003–80 for an employee during the first 9 months of calendar year 2004 may not use the high-low substantiation method in section 5 of this revenue procedure for that employee until January 1, 2005. A payor who used the high-low substantiation method of section 5 of Rev. Proc. 2003–80 for an employee during the first 9 months of calendar year 2004 must

.04 Changes in high-cost localities . The list of high-cost localities in section 5.03 of this revenue procedure differs from the list of high-cost localities in section 5.03 of Rev. Proc. 2003–80 (changes listed by key cities).

(1) The following localities have been added to the list of high-cost localities: Cambridge/St. Michaels, Maryland; Crested Butte, Colorado; Daytona Beach, Florida; Fort Lauderdale, Florida; Hilton Head, South Carolina; Hyannis, Massachusetts; Jamestown/Middletown/Newport, Rhode Island; Kill Devil, North Carolina; Lake Placid, New York; Las Vegas, Nevada; Lewes, Delaware; Miami, Florida; Monterey, California; Myrtle Beach, South Carolina; Palm Beach, Florida; Phoenix/Scottsdale, Arizona; Providence, Rhode Island; San Diego, California; Santa Barbara, California; Santa Fe, New Mexico; South Lake Tahoe, California; Tarrytown, New York; Tom’s River, New Jersey; and Virginia Beach, Virginia.

(2) The portion of the year for which the following are high-cost localities has been changed: Aspen, Colorado; Atlantic

City, New Jersey; Cape May, New Jersey; Hershey, Pennsylvania; Key West, Florida; Martha’s Vineyard, Massachusetts; Nantucket, Massachusetts; Napa, California; Naples, Florida; New Orleans, Louisiana; Ocean City, Maryland; Ocean City, New Jersey; Park City, Utah; Seattle, Washington; Telluride, Colorado; and Vail, Colorado.

(3) The following localities have been removed from the list of high-cost localities: Big Sky, Montana; Coeur d’Alene, Idaho; Edison, New Jersey; Kennebunk/Kittery/Sanford, Maine; King of Prussia/Ft. Washington/Bala Cynwyd, Pennsylvania; Newark, New Jersey; Piscataway/Belle Mead, New Jersey; Stateline, Nevada; Sun Valley, Idaho; Tahoe City, California; Traverse City, Michigan; and Wintergreen, Virginia.

(4) The boroughs of Brooklyn and Staten Island are no longer separately listed as high-cost localities and are now combined with the boroughs of The Bronx and Queens.

.05 Specific limitation . (1) Except as provided in section 5.05(2) of this revenue procedure, a

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for each calendar day (or partial day) the employee is away from home as an expense for food and beverages. For purposes of the preceding sentence, if a per diem allowance for lodging, meal, and incidental expenses is paid at a rate that is less than the federal per diem rate for the locality of travel for each day (or partial day), the payor may treat an amount equal to 40 percent of the allowance as the federal M&IE rate for the locality of travel for each day (or partial day).

(4) If an amount for incidental expenses is computed under section 4.05 of this revenue procedure, none of the amount so computed is subject to limitation under § 274(n) on the deductibility of food and beverage expenses.

.06 No double reimbursement or deduc- tion . If a payor pays a per diem allowance in lieu of reimbursing actual lodging, meal, and incidental expenses or for meal and incidental expenses in accordance with section 4 or 5 of this revenue procedure, any additional payment with respect to those expenses is treated as paid under a nonaccountable plan, is included in the employee’s gross income, is reported as wages or other compensation on the employee’s Form W–2, “ Wage and Tax Statement,” and is subject to withholding and payment of employment taxes. Similarly, if an employee or self-employed individual computes the amount allowable as a deduction for meal and incidental expenses for travel away from home in accordance with section 4.03 or 4.04 of this revenue procedure, no other deduction is allowed to the employee or self-employed individual with respect to those expenses. For example, assume an employee receives a per diem allowance from a payor for lodging, meal, and incidental expenses or for meal and incidental expenses incurred while traveling away from home. During that trip, the employee pays for dinner for the employee and two business associates. The payor reimburses as a business entertainment meal expense the meal expense for the employee and the two business associates. Because the payor also pays a per diem allowance to cover the cost of the employee’s meals, the amount paid by the payor for the employee’s portion of the business entertainment meal expense is treated as paid under a nonaccountable plan, is reported as wages or other compensation on the

continue to use the high-low substantiation method for the remainder of calendar year 2004 for that employee. A payor described in the previous sentence may use the rates and high-cost localities published in section 5 of Rev. Proc. 2003–80, in lieu of the updated rates and high-cost localities provided in section 5 of this revenue procedure, for travel on or after October 1, 2004, and before January 1, 2005, if those rates and localities are used consistently during this period for all employees reimbursed under this method.