IRS Travel Reimbursement Rules: What Businesses Must Know

Your field supervisor just submitted last month's expense report: $4,200 in travel costs across three job sites. Before you approve it, you need to know: will this reimbursement stay tax-free, or will it trigger a surprise tax bill for both you and your employee?

The answer depends on three requirements: proper documentation, submission within 60 days, and return of any excess within 120 days. Miss any one, and the entire reimbursement converts to taxable wages, subject to income tax withholding and 7.65% employment taxes for both employer and employee.

Your tax exposure and your crew's take-home pay depend on getting these rules right.

What Qualifies as Deductible Travel Under IRS Rules

Before you reimburse that hotel stay, use the two questions that guide the IRS's decisions:

• Would other companies in your industry cover this expense?
• Does it help get the job done?

If both answers aren't yes, the IRS won't accept it. "Ordinary" means common and accepted in your industry. "Necessary" means helpful and appropriate for your business operations.

Travel expenses only qualify when you're "away from your tax home," which is the general area of your main place of business. The trip must keep you away substantially longer than an ordinary workday and require sleep or rest. 

Here's what qualifies under each category:

Transportation covers airfare, train, and taxi at actual cost. Personal vehicle use can be reimbursed at the IRS standard mileage rate (70 cents per mile for 2025; the 2026 rate will be announced in December) or actual expenses.

Lodging qualifies when overnight stays are required for business. Receipts are mandatory regardless of amount. FY 2026 per diem rates set a maximum of $110/night for standard locations, with higher caps for designated high-cost areas.

Meals are 50% deductible during overnight business travel. The temporary 100% restaurant deduction expired December 31, 2022. FY 2026 M&IE rates are $68/day for standard locations, ranging up to $92/day in high-cost areas.

Incidentals include tips to porters, hotel staff, and baggage carriers, plus laundry, dry cleaning, and lodging taxes. All must be documented with itemized receipts but don't need to be tracked separately from meals.

The One-Year Rule: When "Temporary" Becomes "Indefinite"

Those expense categories cover what qualifies. But there's another rule that determines whether any of your crew's travel expenses are deductible at all: the one-year rule.

One year is the dividing line. Assignments expected to last less than a year qualify for deductions; those expected to exceed it don't. The IRS determines deductibility based on realistic expectations at assignment start, not actual duration.

Your Houston electrician gets dispatched to the Austin expansion project. Originally a 6-month job, it extends to 14 months. Deductions stop the day you learn of the extension.

Document that conversation: an email, a project update meeting, a scope change order. That's your audit trail when the IRS comes asking.

Watch for These One-Year Rule Traps

Three situations catch companies off guard:

Sequential projects at the same location. Multiple short-term projects at the same site can trigger the one-year rule even if each project is under a year. If the cumulative duration exceeds one year and the IRS determines you reasonably expected long-term work there, they'll treat it as a single indefinite assignment. Suddenly none of those expenses are deductible.

Itinerant workers with no tax home. Workers who move continuously without returning to a regular base may have no tax home. No tax home means no travel deductions, ever. The fix: maintain a principal place of business and document regular returns to base.

Unclear tax home status. Keep records showing your crew members' principal place of business: where they report between assignments, where their tools are stored, where they receive work assignments. A simple log of "return to base" dates strengthens your position if the IRS questions tax home status.

Companies with crews traveling to multiple job sites report that the biggest compliance gap isn't the 60-day rule. It's tracking when "temporary" assignments cross into "indefinite" territory without anyone noticing.

Three Requirements That Keep Reimbursements Tax-Free

An accountable plan keeps your travel reimbursements tax-free.

Get any one of these three requirements wrong, and you're not just facing paperwork. You're looking at surprise tax bills that hit both your budget and your employees' paychecks.

1. Business Connection

Every reimbursed expense must be incurred while performing services as an employee and must qualify as a deductible business expense. Personal expenses and commuting costs never qualify.

2. Submit Documentation Within 60 Days

Submit documentation within 60 days to stay in safe harbor. Late submissions make those specific reimbursements taxable. A pattern of noncompliance can disqualify the entire arrangement for the tax year.

Every expense needs four elements: amount, date, location, and business purpose. Itemized receipts are required at $75 or more, and for all lodging regardless of amount.

3. Pay Back Overpayments Within 120 Days

Got an advance? Reconcile it against actual expenses. Any excess must be returned within 120 days to maintain accountable plan status.

Track Per Diem Expenses Without Itemized Receipts

Per diem rates let you reimburse standardized daily amounts without requiring itemized meal receipts. The IRS publishes these rates annually on October 1.

FY 2026 Rates (October 2025 – September 2026)

For FY 2026, the GSA kept rates unchanged from the prior year:

The meals and incidental expenses (M&IE) portion of the per diem rate is limited to 75% on the first and last travel days, as is standard under federal per diem guidelines.

Reimburse above these rates and the excess becomes taxable income for the employee.

Even when using per diem, you must still document travel dates, destinations, and business purpose.

Find Your Location's Rate

The easiest way to calculate per diem is to use the GSA's Lookup Tool. You can search by city, state, or ZIP code.

When Your Crew Travels Across Rate Zones

Your Dallas crew travels to San Francisco? Document the rate lookup and apply the high-cost locality rate ($86/day M&IE), not the standard rate.

When GSA rates change on October 1, use the rate in effect on each travel day. Trips spanning the change date require tracking both rates.

Keep a log of rate lookups to demonstrate you applied the correct locality rate during audits.

Documentation Best Practices for IRS Audits

You know what's required. Here's how to make it audit-proof.

Build Your Audit Trail in Real Time

Contemporaneous records carry more weight than reconstructed ones. A mileage log created at the time of travel is stronger than one pieced together from memory three months later.

Your crew chief texts a photo of a hotel receipt at 11pm? That's valid documentation if it shows all four elements. Email confirmations from booking platforms count too.

For mileage, every trip needs date, miles driven, destination, and business purpose. Record them the same day, not when you're scrambling before an audit. Reconstructed logs can still pass if adequately supported, but they face higher scrutiny.

Know What Doesn't Count as Documentation

Credit card statements alone don't satisfy IRS requirements because they don't capture business purpose. You'll need supplemental logs or written statements to fully substantiate.

If receipts get lost, contemporaneous notes paired with bank statements can serve as backup. But that's a fallback, not best practice.

Store Records for Three Years

Maintain records for at least three years from your tax return filing date.

Field service companies using centralized booking capture receipt data automatically, eliminating the scramble before quarterly audits.

Avoid These Compliance Traps

Three situations create audit risk if you're not careful:

• Mixed-purpose trips. Only the business portion of bleisure travel qualifies. Transportation is fully deductible if the primary purpose is business; lodging and meals only for working days.
• Spousal travel. Generally not deductible. The exception requires formal employment, documented business purpose, and independently deductible expenses.
• Penalty exposure. Accuracy-related penalties hit 20% for negligence. Civil fraud can reach 75%.

Stop Chasing Compliance Manually

If tracking all these requirements sounds like a lot of administrative overhead, it is. Most field service companies struggle with exactly this. Crews generate dozens of reimbursable expenses every week, each needing four documented elements, submitted within 60 days, with any excess returned within 120 days.

Centralized booking platforms capture this data automatically: amount, date, location, and business purpose attached to every reservation before your crew even checks in. No chasing receipts. No reconstructing logs at month-end.

When documentation happens at the point of purchase, compliance stops being a month-end scramble. RMS Energy cut the time spent chasing receipts and booking rooms by 4x after switching to centralized booking. 

Stop chasing paper. Book a demo to see how Engine automates compliant documentation for every trip.

Frequently Asked Questions

What happens if employees don't submit expense reports within 60 days?

Late documentation makes those specific reimbursements taxable. The employee loses accountable plan protection, and both of you pay the price: income tax for them, employment taxes for both.

A pattern of late submissions is worse. It can disqualify your entire reimbursement arrangement for the tax year.

Employees can't deduct unreimbursed business expenses on their personal returns through tax year 2025, so there's no fallback.

What's the difference between temporary and indefinite work assignments?

Temporary assignments are expected to last one year or less; all travel expenses qualify for deduction. Indefinite assignments are expected to exceed one year; no travel expenses are deductible from day one.

The key word is "expected." The determination is based on realistic expectations at assignment start, not actual duration. If a six-month project extends past a year, deductions stop the day you learn of the extension.

Can I use per diem rates instead of tracking actual expenses?

Yes, per diem simplifies meal tracking significantly. FY 2026 rates are $68/day for standard locations, up to $92/day for high-cost areas.

Self-employed individuals cannot use per diem rates for lodging. They must track actual costs.

With our without per diem, you must still document travel dates, destinations, and business purpose.

What documentation do I need to survive an IRS audit?

Four elements for every expense: amount, date, location, and business purpose.

Keep itemized receipts for anything $75 or more. Lodging requires receipts regardless of cost.

Mileage logs must be contemporaneous, created at or near the time of travel, not reconstructed months later.

Maintain all records for at least three years from your tax return filing date.

How does the one-year rule affect my traveling crews?

Assignments expected to last one year or less are temporary; expenses are deductible. Assignments expected to exceed one year are indefinite from day one; no deductions allowed.

Watch for sequential project risk: multiple short projects at the same location can be treated as one indefinite assignment if the cumulative duration exceeds a year. And crews who never return to a home base may be classified as itinerant workers with no tax home, making all their travel expenses non-deductible.

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