Notice 2026-60, 2026-41 I.R.B. 1, Sept. 23, 2026

On an annual basis, the Internal Revenue Service releases administrative guidance updating the special per diem rates and list of high-cost localities utilized by taxpayers to substantiate ordinary and necessary business travel expenses. Notice 2026-60 serves as the official IRS release for the 2026–2027 fiscal year cycle, covering travel performed on or after October 1, 2026, through September 30, 2027. Specifically, Notice 2026-60 provides:

“the 2026-2027 special per diem rates for taxpayers to use in substantiating the amount of ordinary and necessary business expenses incurred while traveling away from home, specifically (1) the special transportation industry meal and incidental expenses (M&IE) rates, (2) the rate for the incidental expenses only deduction, and (3) the rates and list of high-cost localities for purposes of the high-low substantiation method.”

The administrative issuance of Notice 2026-60 is essential for employers operating accountable plans, transportation sector businesses, and qualifying tax-deductible travelers who seek to streamline compliance and avoid the administrative burden of maintaining detailed receipts for every lodging and meal expenditure.

Statutory Authority and Legislative Background

The underlying statutory statutory architecture governing per diem substantiation rests upon Internal Revenue Code (IRC) § 162(a), which permits a tax deduction for “ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including expenses for travel away from home.” However, personal living expenses are strictly non-deductible under IRC § 262.

To prevent taxpayer abuse, IRC § 274(d) imposes rigorous substantiation requirements on travel away from home, mandating proof of time, place, business purpose, and amount. Recognizing the administrative burden of recordkeeping for routine travel, IRC § 274(d) authorizes the Secretary of the Treasury to prescribe regulations waiving strict substantiation where appropriate. Pursuant to this authority, Treas. Reg. § 1.274-5(g) authorizes the Commissioner to establish rules under which per diem allowances are deemed:

“(1) as equivalent to substantiation, by adequate records or other sufficient evidence, of the amount of travel expenses for purposes of § 1.274-5(c), and (2) as satisfying the requirements of an adequate accounting to the employer of the amount of travel expenses for purposes of § 1.274-5(f).”

Furthermore, Treas. Reg. § 1.274-5(j)(1) and (j)(3) explicitly authorize the Commissioner to establish deemed substantiation amounts for meals and incidental expenses in lieu of actual costs.

For employee reimbursements, IRC § 62(a)(2)(A) and § 62(c) govern the tax treatment under accountable plans. Under Treas. Reg. § 1.62-2(c), reimbursements meeting business connection, deemed substantiation, and return-of-excess requirements are excluded from gross income and employment taxes. Conversely, failure to meet these criteria recharacterizes payments under a nonaccountable plan, subjecting amounts to Form W-2 reporting and income/employment tax withholding under IRC §§ 3121, 3306, and 3401.

Finally, the Tax Cuts and Jobs Act (TCJA), Pub. L. No. 115-97, significantly altered employee deductions. IRC § 67(g) suspended all miscellaneous itemized deductions subject to the 2-percent AGI floor for tax years beginning after December 31, 2017, and before January 1, 2026, effectively disallowing unreimbursed employee travel expenses. Consequently, per diem meal expense deductions under Notice 2026-60 are restricted to self-employed individuals under IRC § 62(a)(1) and statutory above-the-line employee categories under IRC § 62(a)(2)(B)–(E) (e.g., Armed Forces reservists, qualified performing artists, fee-basis state/local officials, and eligible educators).

Analysis of Law and Administrative Mechanism

Notice 2026-60 does not operate in a vacuum; it acts as the operational rate schedule for the permanent procedural framework set forth in Revenue Procedure 2019-48, 2019-51 I.R.B. 1392. Revenue Procedure 2019-48 establishes that:

“Rev. Proc. 2019-48... provides rules for using a per diem rate to substantiate, under § 274(d) of the Internal Revenue Code and § 1.274-5 of the Income Tax Regulations, the amount of ordinary and necessary business expenses paid or incurred while traveling away from home.”

Under Rev. Proc. 2019-48, a per diem allowance satisfies the deemed substantiation standard only if it is paid at or below the federal per diem rate, a flat rate, or an IRS-specified schedule.

When analyzing meal expenses, IRC § 274(n)(1) generally limits the statutory deduction for food and beverages to 50 percent of the allowable expense. However, under IRC § 274(n)(3), food and beverage expenses incurred by individuals subject to the hours of service limitations of the Department of Transportation (DOT)—such as interstate truck drivers, bus operators, and airline crews—benefit from an elevated 80 percent deduction limit.
For incidental expenses, Notice 2026-60 and Rev. Proc. 2019-48 align the tax definition with the Federal Travel Regulations (FTR), 41 C.F.R. 300-3.1, defining “incidental expenses” narrowly to cover fees and tips given to porters, baggage carriers, bellhops, hotel staff, and staff on ships, specifically excluding transportation, taxi fares, and lodging-related fees.

Operational Application to Facts and Updated Rates

Notice 2026-60 establishes the specific monetary benchmarks for travel performed from October 1, 2026, through September 30, 2027 across three primary categories:

Transportation Industry Special M&IE Rates

Taxpayers operating within the transportation industry—defined under Rev. Proc. 2019-48 § 4.04(2) as work directly involving moving people or goods by airplane, barge, bus, ship, train, or truck involving regular travel away from home—may elect special baseline rates. For 2026–2027, the special M&IE rates under Section 3 of Notice 2026-60 are:

Continental United States (CONUS): $80 per day
Outside Continental United States (OCONUS): $86 per day

Incidental Expenses Only Deduction Rate

For taxpayers who pay or incur incidental expenses but do not incur meal expenses, Section 4 of Notice 2026-60 maintains the standard rate of $5 per day for both CONUS and OCONUS travel. Under Rev. Proc. 2019-48 § 6.05(5), the $5 incidental expense allowance is completely exempt from the 50 percent statutory reduction under IRC § 274(n).

High-Low Substantiation Method Rates

To simplify accounting for employers reimbursing CONUS travel without tracking local federal per diem rates for hundreds of individual destinations, Rev. Proc. 2019-48 § 5 permits the high-low substantiation method. Notice 2026-60 updates the high-low rates under Section 5.1 as follows:

High-Cost Locality Per Diem Rate: $329 (up from $319 in prior guidance)
Low-Cost Locality Per Diem Rate: $230 (up from $225 in prior guidance)

For purposes of applying the statutory meal deduction limits under IRC § 274(n):

High-Cost Locality Meal Portion: $86 per day
Low-Cost Locality Meal Portion: $74 per day

For employers reimbursing meal and incidental expenses only under the high-low method, the deemed substantiated M&IE rates are $86 per day for high-cost localities and $74 per day for low-cost localities.

Threshold Adjustment and Reclassification of High-Cost Localities

Under Section 5.2 of Notice 2026-60, the federal per diem threshold required for a locality to qualify as a “high-cost locality” increases to $280 (up from $272). Notice 2026-60 details significant geographical reclassifications:

Added High-Cost Localities: Tucson, Arizona; San Mateo/Foster City/Belmont, California; Albuquerque, New Mexico; and Cody, Wyoming.
Removed High-Cost Localities: Panama City, Florida no longer qualifies as a high-cost locality.
Modified Seasonal Boundaries: 15 localities underwent changes to the specific portion of the calendar year during which they qualify as high-cost localities (e.g., New York City, NY; Aspen, CO; Napa, CA; South Lake Tahoe, CA; Philadelphia, PA; Hilton Head, SC; and others).
Technical Corrections: A technical correction was made to the high-cost calendar period for Sun Valley/Ketchum, Idaho.

Interplay with Prior IRS Guidance and Transition Rules

Notice 2026-60 maintains a direct legal relationship with Notice 2025-54 and Rev. Proc. 2019-48. Section 7 of Notice 2026-60 explicitly provides that Notice 2025-54, 2025-41 I.R.B. 479 (which governed the October 1, 2025 through September 30, 2026 period) is “superseded” effective October 1, 2026.

However, recognizing that employer reimbursement schemes operate on a calendar-year basis while federal per diem updates occur on an October 1 fiscal-year boundary, Notice 2026-60 incorporates the mandatory transition rules set forth in Rev. Proc. 2019-48 §§ 4.06 and 5.04. For travel occurring during the last three months of calendar year 2026 (October 1 through December 31, 2026), taxpayers who used the per diem substantiation method or high-low method during the first nine months of 2026 have two allowable options:

Continue using the prior rates and high-cost locality list from Notice 2025-54 for the remainder of calendar year 2026; or
Adopt the updated rates and high-cost locality list under Notice 2026-60 effective October 1, 2026.

Under Rev. Proc. 2019-48 §§ 4.06(1) and 5.04(2), whichever option is selected must be applied consistently to all employees reimbursed under the per diem or high-low method throughout the transition period. Furthermore, under Rev. Proc. 2019-48 § 4.06(2), a taxpayer who uses the special transportation industry rates during the first nine months of the calendar year must continue using those rates through December 31, 2026, and cannot switch to standard federal M&IE rates until January 1, 2027.

Conclusions and Practical Implications

Notice 2026-60 establishes binding administrative authority for substantiating business travel expenses for the 2026–2027 fiscal year. The IRS concludes that compliance with the updated monetary thresholds ($329/$230 high-low rates; $80/$86 transportation rates; $5 incidental rate) satisfies the adequate accounting standards of Treas. Reg. § 1.274-5 and accountable plan rules of Treas. Reg. § 1.62-2.

For tax practitioners, client advisory must focus on updating payroll systems and expense management software to reflect the $280 high-cost threshold and the new locality inclusions/exclusions effective October 1, 2026, while ensuring that the calendar-year transition election is maintained consistently across all employees to preserve accountable plan tax exclusion status under IRC § 62(c).

Prepared with assistance from Gemini Notebook.