SECTION 5. HIGH-LOW

SUBSTANTIATION METHOD

.01 In general . If a payor pays a per diem allowance in lieu of reimbursing actual 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 of this revenue procedure.

.02 Specific high-low rates . Except as provided in section 5.06 of this revenue procedure, the per diem rate for purposes of this section 5 is $226 for travel to any

Key City County or other defined location

Arizona

Phoenix/Scottsdale Maricopa (January 1-March 31)

California

Napa Napa San Diego San Diego San Francisco San Francisco Santa Monica City limits of Santa Monica

Colorado

Aspen Pitkin (December 1-March 31) Crested Butte/Gunnison Gunnison (December 1-April 30) Silverthorne/Breckenridge Summit (December 1-March 31) Steamboat Springs Routt (December 1-March 31) Telluride San Miguel (October 1-April 30) Vail Eagle (December 1-March 31)

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)

Florida

Key West Monroe

October 17, 2005 733 2005–42 I.R.B.

Key City County or other defined location

Miami Miami-Dade (January 1-April 30) Naples Collier (February 1-March 31) Palm Beach

(February 1-March 31)

Illinois

Boca Raton, Delray Beach, Jupiter, Palm Beach Gardens, Palm Beach, Palm Beach Shores, Singer Island and West Palm Beach

Chicago Cook and Lake (October 1-June 30 and September 1-September 30)

Louisiana

New Orleans Orleans, St. Bernard, Jefferson, and (October 1-May 31) Plaquemine Parishes

Maine

Bar Harbor Hancock (July 1-August 31)

Maryland

(For the counties of Montgomery and Prince George’s, see District of Columbia) Baltimore Baltimore County and Baltimore City Cambridge/St. Michaels Dorchester and Talbot (June 1-August 31) Ocean City Worcester (June 1-September 30)

Massachusetts

Boston/Cambridge Suffolk, City of Cambridge Martha’s Vineyard Dukes (July 1-August 31) Nantucket Nantucket (June 1-August 31)

New Hampshire

Conway Caroll (July 1-August 31)

New Jersey

Cape May/Ocean City Cape May (July 1-August 31)

New York

Floral Park/Garden City/Glen Cove/Great Neck/Roslyn

Nassau

Lake Placid Essex (July 1-August 31)

2005–42 I.R.B. 734 October 17, 2005

Key City County or other defined location

Manhattan Boroughs of Manhattan, Brooklyn, Queens, the Bronx and Staten Island

Riverhead/Ronkonkoma/ Melville/ Smithtown/Huntington Station/ Amagansett/East Hampton/ Montauk/Southampton/ Islandia/Commack/Medford/ Stony Brook/Hauppauge/ Centereach

Suffolk

Saratoga Springs/Schenectady Saratoga and Schenectady (July 1-August 31) Tarrytown/White Plains/New Westchester Rochelle/Yonkers

Pennsylvania

Philadelphia Philadelphia

Rhode Island

Jamestown/Middletown/ Newport

Newport

(October 1-October 31 and May 1-September 30) Providence Providence

Utah

Park City Summit (December 1-March 31)

Washington

Seattle King

locality; Cape May, New Jersey and Ocean City, New Jersey are one locality; Carle Place/Plainview/Rockville Centre/Syosset/Uniondale/ Woodbury have been removed from, and Floral Park/Roslyn have been added to, Nassau County, New York; Smithtown/Huntington Station/Amagansett/East Hampton/Montauk/Southampton/Islandia/Commack/Medford/Stony Brook/Hauppage/ Centereach have been added to Suffolk County, New York; and White Plains, Tarrytown, New Rochelle, and Yonkers are combined as Westchester County, New York.

.05 Specific limitation . (1) Except as provided in section 5.05(2) of this revenue procedure, a payor that uses the high-low substantiation method with respect to an employee must use that method for all amounts paid

.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. 2005–10 (changes listed by key cities).

(1) The following localities have been added to the list of high-cost localities: Steamboat Springs, Colorado; Bar Harbor, Maine; Conway, New Hampshire; and Saratoga Springs/Schenectady, New York.

(2) The portion of the year for which the following are high-cost localities has been changed: Phoenix/Scottsdale, Arizona; Napa, California; Aspen, Colorado; Crested Butte/Gunnison, Colorado; Telluride, Colorado; Vail, Colorado; Miami, Florida; Naples, Florida; Palm Beach, Florida; Chicago, Illinois; New Orleans, Louisiana; Ocean City, Maryland; Martha’s Vineyard, Massachusetts; Nan

tucket, Massachusetts; Cape May/Ocean City, New Jersey; and Seattle, Washington.

(3) The following localities have been removed from the list of high-cost localities: Monterey, California; Palm Springs, California; Santa Barbara, California; South Lake Tahoe, California; Lewes, Delaware; Daytona Beach, Florida; Fort Lauderdale, Florida; Hyannis, Massachusetts; Traverse City, Michigan; Atlantic City, New Jersey; Princeton/Trenton, New Jersey; Santa Fe, New Mexico; Kill Devil, North Carolina; Hershey, Pennsylvania; Hilton Head, South Carolina; and Virginia Beach, Virginia.

(4) The following localities have been redefined: New Orleans, Louisiana has added the parishes of Jefferson and Plaquemine; Boston, Massachusetts and Cambridge, Massachusetts are one

October 17, 2005 735 2005–42 I.R.B.

.05 Application of the appropriate § 274(n) limitation on meal expenses . Except as provided in section 6.05(4), all or part of the amount of an expense deemed substantiated under this revenue procedure is subject to the appropriate limitation under § 274(n) (see section 2.02 of this revenue procedure) on the deductibility of food and beverage expenses.

(1) If an amount for meal and incidental expenses is computed pursuant to section 4.03 of this revenue procedure, the taxpayer must treat that amount as an expense for food and beverages.

(2) If a per diem allowance is paid only for meal and incidental expenses, the payor must treat an amount equal to the lesser of the allowance or the federal M&IE rate for the locality of travel for each day (or partial day, see section 6.04 of this revenue procedure) as an expense for food and beverages.

(3) If a per diem allowance is paid for lodging, meal, and incidental expenses, the payor must treat an amount equal to the federal M&IE rate for the locality of travel 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.

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. 2005–10 for an employee during the first 9 months of calendar year 2005 may not use the high-low substantiation method in section 5 of this revenue procedure for that employee until January 1, 2006. A payor who used the high-low substantiation method of section 5 of Rev. Proc. 2005–10 for an employee during the first 9 months of calendar year 2005 must continue to use the high-low substantiation method for the remainder of calendar year 2005 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. 2005–10, 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, 2005, and before January 1, 2006, if those rates and localities are used consistently during this period for all employees reimbursed under this method.