The Internal Revenue Service (IRS) recently issued Notice 2025-54, providing the 2025-2026 special per diem rates for substantiating business travel expenses. This notice, effective October 1, 2025, works in conjunction with the rules established in Rev. Proc. 2019-48 and is essential for tax professionals advising clients on accountable plan reimbursements and travel deductions. This article will analyze the new rates, their interaction with procedural rules, and the methodology the IRS uses to establish the high-low rates.

Procedural Framework: Rev. Proc. 2019-48

To fully understand the application of the rates in Notice 2025-54, one must first be familiar with Rev. Proc. 2019-48, which provides the foundational rules for using per diem rates to substantiate ordinary and necessary business travel expenses under § 274(d) and § 1.274-5 of the Income Tax Regulations. While using a per diem method is optional, it offers an administrative convenience over substantiating actual expenses, provided adequate records of time, place, and business purpose are maintained.

Rev. Proc. 2019-48 outlines several substantiation methods:

Per Diem Substantiation Method: A payor may reimburse lodging, meal, and incidental expenses (M&IE) up to the applicable federal per diem rate for the locality of travel. This method relies on rates published by the General Services Administration (GSA), Department of Defense, and Department of State.
M&IE-Only Substantiation Method: Used when a payor covers actual lodging costs separately (e.g., provides lodging in-kind or pays the hotel directly) and provides a per diem only for meals and incidental expenses. The deemed substantiated amount is the lesser of the allowance or the federal M&IE rate.
High-Low Substantiation Method: An alternative to the locality-by-locality federal rates, this method allows a payor to use one rate for designated high-cost localities within the continental U.S. (CONUS) and another for all other CONUS localities.

Notice 2025-54 provides the specific rates and the list of high-cost localities required to implement the high-low method for the period beginning October 1, 2025. Taxpayers who utilize the rates and localities published in this notice must adhere to the rules set forth in Rev. Proc. 2019-48.

The 2025-2026 Special Per Diem Rates

Notice 2025-54 establishes the rates effective for travel on or after October 1, 2025.

High-Low Substantiation Rates

For the period beginning October 1, 2025, the annual rates for the high-low substantiation method are:

$319 for travel to any high-cost locality within CONUS.
$225 for travel to any other locality within CONUS.

Under § 274(n), meal costs are generally subject to a 50% limitation on deductibility. The portion of the high-low rates treated as paid for meals is:

$86 for travel to a high-cost locality.
$74 for travel to any other CONUS locality.

These same amounts ($86 and $74) are also used as the M&IE-only per diem rates under the high-low method.

Special Rates for the Transportation Industry

Notice 2025-54 also provides special M&IE rates for taxpayers in the transportation industry, as defined in section 4.04 of Rev. Proc. 2019-48. The rates are:

$80 for any locality of travel within CONUS.
$86 for any locality of travel outside CONUS (OCONUS).

Incidental Expenses Only Rate

For self-employed individuals or specified employees who incur incidental expenses but not meal expenses, the rate for the incidental expenses-only deduction is $5 per day for any CONUS or OCONUS locality. This amount is not subject to the § 274(n) limitation on meal expenses.

Determining High-Cost Localities

The IRS's methodology for designating a locality as "high-cost" is based on the federal per diem rates published by the GSA. Section 5.02 of Notice 2025-54 specifies that localities with a federal per diem rate of $272 or more are designated as high-cost for all or part of the year. These federal rates are the sum of the applicable federal lodging expense rate and the federal M&IE rate for a given locality.

For the 2025-2026 period, the list of high-cost localities remains unchanged from the prior year's list in Notice 2024-68. The list includes major metropolitan areas like New York City, Los Angeles, and Washington, D.C., as well as seasonal destinations such as Aspen, CO, and Key West, FL, which may only be designated as high-cost during peak travel seasons.

Effective Date and Transition Rules

The rates and high-cost localities provided in Notice 2025-54 are effective for per diem allowances paid to an employee on or after October 1, 2025, for travel on or after that date. For deduction purposes, the notice is effective for M&IE or incidental expenses paid or incurred on or after October 1, 2025.

Rev. Proc. 2019-48 provides crucial transition rules for the last three months of the calendar year (October 1 to December 31). A payor using the high-low method must continue to use that method for an employee for the entire calendar year. However, for the final three months, the payor may choose to use either:

The rates and high-cost localities in effect for the first nine months of the calendar year, OR
The updated rates and high-cost localities effective October 1.

This choice must be applied consistently for all employees reimbursed under the high-low method. This flexibility allows employers to avoid making system-wide changes at the end of a calendar year.

Notice 2025-54 formally supersedes Notice 2024-68, which provided the rates for the preceding period.

Prepared with assistance from NotebookLM.