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IRS.gov Website
Publication 535
taxmap/pubs/p535-054.htm#en_us_publink1000209144

Chapter 11
Other Expenses(p40)

What's New(p40)


taxmap/pubs/p535-054.htm#en_us_publink1000209146
Standard mileage rate.(p40)
Beginning in 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for business use is 56.5 cents per mile. For more information, see Car and truck expenses under Miscellaneous Expenses.

taxmap/pubs/p535-054.htm#en_us_publink1000272106Introduction

This chapter covers business expenses that may not have been explained to you, as a business owner, in previous chapters of this publication.

taxmap/pubs/p535-054.htm#TXMP6177a1f0

Useful items

You may want to see:


Publication
 15-B Employer's Tax Guide to Fringe Benefits
 463 Travel, Entertainment, Gift, and Car Expenses
 526 Charitable Contributions
 529 Miscellaneous Deductions
 544 Sales and Other Dispositions of Assets
 970 Tax Benefits for Education
 1542 Per Diem Rates
See chapter 12 for information about getting publications and forms.
taxmap/pubs/p535-054.htm#en_us_publink1000209148

Reimbursement of Travel, Meals, and Entertainment(p41)

rule
The following discussion explains how to handle any reimbursements or allowances you may provide to your employees under a reimbursement or allowance arrangement for travel, meals, and entertainment expenses. If you are self-employed and report your income and expenses on Schedule C or C-EZ (Form 1040), see Publication 463.
To be deductible for tax purposes, expenses incurred for travel, meals, and entertainment must be ordinary and necessary expenses incurred while carrying on your trade or business. Generally, you also must show that entertainment expenses (including meals) are directly related to, or associated with, the conduct of your trade or business. For more information on travel, meals, and entertainment, including deductibility, see Publication 463.
taxmap/pubs/p535-054.htm#en_us_publink1000209149

Reimbursements(p41)

rule
A "reimbursement or allowance arrangement" provides for payment of advances, reimbursements, and allowances for travel, meals, and entertainment expenses incurred by your employees during the ordinary course of business. If the expenses are substantiated, you can deduct the allowable amount on your tax return. Because of differences between accounting methods and tax law, the amount you can deduct for tax purposes may not be the same as the amount you deduct on your business books and records. For example, you can deduct 100% of the cost of meals on your business books and records. However, only 50% of these costs are allowed by law as a tax deduction.
How you deduct a business expense under a reimbursement or allowance arrangement depends on whether you have: If you reimburse these expenses under an accountable plan, deduct them as travel, meals, or entertainment expenses.
If you reimburse these expenses under a nonaccountable plan, report the reimbursements as wages on Form W-2, Wage and Tax Statement, and deduct them as wages on the appropriate line of your tax return. If you make a single payment to your employees and it includes both wages and an expense reimbursement, you must specify the amount of the reimbursement and report it accordingly. See Table 11-1, Reporting Reimbursements.
taxmap/pubs/p535-054.htm#en_us_publink1000209150

Accountable Plans(p41)

rule
An accountable plan requires your employees to meet all of the following requirements. Each employee must:
  1. Have paid or incurred deductible expenses while performing services as your employee,
  2. Adequately account to you for these expenses within a reasonable period of time, and
  3. Return any excess reimbursement or allowance within a reasonable period of time.
An arrangement under which you advance money to employees is treated as meeting (3) above only if the following requirements are also met.
If any expenses reimbursed under this arrangement are not substantiated, or an excess reimbursement is not returned within a reasonable period of time by an employee, you cannot treat these expenses as reimbursed under an accountable plan. Instead, treat the reimbursed expenses as paid under a nonaccountable plan, discussed later.
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Adequate accounting.(p41)

rule
Your employees must adequately account to you for their travel, meals, and entertainment expenses. They must give you documentary evidence of their travel, mileage, and other employee business expenses. This evidence should include items such as receipts, along with either a statement of expenses, an account book, a day-planner, or similar record in which the employee entered each expense at or near the time the expense was incurred.
taxmap/pubs/p535-054.htm#en_us_publink1000209152

Excess reimbursement or allowance.(p41)

rule
An excess reimbursement or allowance is any amount you pay to an employee that is more than the business-related expenses for which the employee adequately accounted. The employee must return any excess reimbursement or other expense allowance to you within a reasonable period of time.
taxmap/pubs/p535-054.htm#en_us_publink1000209153

Reasonable period of time.(p42)

rule
A reasonable period of time depends on the facts and circumstances. Generally, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time.
  1. You give an advance within 30 days of the time the employee pays or incurs the expense.
  2. Your employees adequately account for their expenses within 60 days after the expenses were paid or incurred.
  3. Your employees return any excess reimbursement within 120 days after the expenses were paid or incurred.
  4. You give a periodic statement (at least quarterly) to your employees that asks them to either return or adequately account for outstanding advances and they comply within 120 days of the date of the statement.
taxmap/pubs/p535-054.htm#en_us_publink1000209154

How to deduct.(p42)

rule
You can claim a deduction for travel, meals, and entertainment expenses if you reimburse your employees for these expenses under an accountable plan. Generally, the amount you can deduct for meals and entertainment is subject to a 50% limit, discussed later. If you are a sole proprietor, or are filing as a single member limited liability company, deduct the travel reimbursement on line 24a and the deductible part of the meals and entertainment reimbursement on line 24b, Schedule C (Form 1040) or line 2, Schedule C-EZ (Form 1040).
If you are filing an income tax return for a corporation, include the reimbursement on the Other deductions line of Form 1120, U.S. Corporation Income Tax Return. If you are filing any other business income tax return, such as a partnership or S corporation return, deduct the reimbursement on the appropriate line of the return as provided in the instructions for that return.
taxmap/pubs/p535-054.htm#en_us_publink1000209240

Table 11-1. Reporting Reimbursements

IF the type of reimbursement (or other expense allowance) arrangement is under THEN the employer reports on Form W-2
An accountable plan with:
Actual expense reimbursement:
Adequate accounting made and excess returned
No amount.
Actual expense reimbursement:
Adequate accounting and return of excess both required but excess not returned
The excess amount as wages in box 1.
Per diem or mileage allowance up to the federal rate:
Adequate accounting made and excess returned
No amount.
Per diem or mileage allowance up to the federal rate:
Adequate accounting and return of excess both required but excess not returned
The excess amount as wages in box 1. The amount up to the federal rate is reported only in box 12—it is not reported in box 1.
Per diem or mileage allowance exceeds the federal rate:
Adequate accounting made up to the federal rate only and excess not returned
The excess amount as wages in box 1. The amount up to the federal rate is reported only in box 12—it is not reported in box 1.
A nonaccountable plan with:
Either adequate accounting or return of excess, or both, not required by planThe entire amount as wages in box 1.
No reimbursement plan The entire amount as wages in box 1.
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Per Diem and Car Allowances(p42)

rule
You can reimburse your employees under an accountable plan based on travel days, miles, or some other fixed allowance. In these cases, your employee is considered to have accounted to you for the amount of the expense that does not exceed the rates established by the federal government. Your employee must actually substantiate to you the other elements of the expense, such as time, place, and business purpose.
taxmap/pubs/p535-054.htm#en_us_publink1000209158

Federal rate.(p42)

rule
The federal rate can be figured using any one of the following methods.
  1. For car expenses:
    1. The standard mileage rate.
    2. A fixed and variable rate (FAVR).
  2. For per diem amounts:
    1. The regular federal per diem rate.
    2. The standard meal allowance.
    3. The high-low rate.
taxmap/pubs/p535-054.htm#en_us_publink1000209159

Car allowance.(p42)

rule
Your employee is considered to have accounted to you for car expenses that do not exceed the standard mileage rate. Beginning in 2013, the standard business mileage rate is 56.5 cents per mile.
You can choose to reimburse your employees using a fixed and variable rate (FAVR) allowance. This is an allowance that includes a combination of payments covering fixed and variable costs, such as a cents-per-mile rate to cover your employees' variable operating costs (such as gas, oil, etc.) plus a flat amount to cover your employees' fixed costs (such as depreciation, insurance, etc.). For information on using a FAVR allowance, see Revenue Procedure 2010-51, available at www.irs.gov/irb/2010-51_IRB/ar14.html and Notice 2012-72, available at www.irs.gov/irb/2012-50_IRB/ar10.html.
taxmap/pubs/p535-054.htm#en_us_publink1000209160

Per diem allowance.(p42)

rule
If your employee actually substantiates to you the other elements (discussed earlier) of the expenses reimbursed using the per diem allowance, how you report and deduct the allowance depends on whether the allowance is for lodging and meal expenses or for meal expenses only and whether the allowance is more than the federal rate.
taxmap/pubs/p535-054.htm#en_us_publink1000209161
Regular federal per diem rate.(p42)
The regular federal per diem rate is the highest amount the federal government will pay to its employees while away from home on travel. It has two components:
  1. Lodging expense, and
  2. Meal and incidental expense (M&IE).
The rates are different for different locations. Publication 1542 lists the rates in the continental United States.
taxmap/pubs/p535-054.htm#en_us_publink1000209162
Standard meal allowance.(p42)
The federal rate for meal and incidental expenses (M&IE) is the standard meal allowance. You can pay only an M&IE allowance to employees who travel away from home if:
taxmap/pubs/p535-054.htm#en_us_publink1000209163
Internet access.(p42)
Per diem rates are available on the Internet. You can access per diem rates at www.gsa.gov/perdiemrates.
taxmap/pubs/p535-054.htm#en_us_publink1000269486
High-low method.(p42)
This is a simplified method of computing the federal per diem rate for travel within the continental United States. It eliminates the need to keep a current list of the per diem rate for each city.
Under the high-low method, the per diem amount for travel during January through September of 2013 is $242 ($65 for M&IE) for certain high-cost locations. All other areas have a per diem amount of $163 ($52 for M&IE). The high-cost locations eligible for the higher per diem amount under the high-low method are listed in Publication 1542.
Effective October 1, 2013, the per diem rate for high-cost locations increased to $251 ($65 for M&IE). The rate for all other locations increased to $170 ($52 for M&IE). For October, November, and December 2013, you can either continue to use the rates described in the preceding paragraph or change to the new rates. However, you must use the same rate for all employees reimbursed under the high-low method.
For more information about the high-low method, see Notice 2013-65, available at www.irs.gov/irb/2013-44_IRB/ar13.html. See Publication 1542 (available on the Internet at IRS.gov) for the current per diem rates for all locations.
taxmap/pubs/p535-054.htm#en_us_publink1000209165

Reporting per diem and car allowances.(p42)

rule
The following discussion explains how to report per diem and car allowances. The manner in which you report them depends on how the allowance compares to the federal rate. See Table 11-1.
taxmap/pubs/p535-054.htm#en_us_publink1000209166
Allowance less than or equal to the federal rate.(p42)
If your allowance for the employee is less than or equal to the appropriate federal rate, that allowance is not included as part of the employee's pay in box 1 of the employee's Form W-2. Deduct the allowance as travel expenses (including meals that may be subject to the 50% limit, discussed later). See How to deduct under Accountable Plans, earlier.
taxmap/pubs/p535-054.htm#en_us_publink1000209167
Allowance more than the federal rate.(p42)
If your employee's allowance is more than the appropriate federal rate, you must report the allowance as two separate items.
Include the allowance amount up to the federal rate in box 12 (code L) of the employee's Form W-2. Deduct it as travel expenses (as explained above). This part of the allowance is treated as reimbursed under an accountable plan.
Include the amount that is more than the federal rate in box 1 (and in boxes 3 and 5 if they apply) of the employee's Form W-2. Deduct it as wages subject to income tax withholding, social security, Medicare, and federal unemployment taxes. This part of the allowance is treated as reimbursed under a nonaccountable plan as explained later under Nonaccountable Plans.
taxmap/pubs/p535-054.htm#en_us_publink1000209168

Meals and Entertainment(p42)

rule
Under an accountable plan, you can generally deduct only 50% of any otherwise deductible business-related meal and entertainment expenses you reimburse your employees. The deduction limit applies even if you reimburse them for 100% of the expenses.
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Application of the 50% limit.(p42)

rule
The 50% deduction limit applies to reimbursements you make to your employees for expenses they incur for meals while traveling away from home on business and for entertaining business customers at your place of business, a restaurant, or another location. It applies to expenses incurred at a business convention or reception, business meeting, or business luncheon at a club. The deduction limit may also apply to meals you furnish on your premises to your employees.
taxmap/pubs/p535-054.htm#en_us_publink1000209170
Related expenses.(p43)
Taxes and tips relating to a meal or entertainment activity you reimburse to your employee under an accountable plan are included in the amount subject to the 50% limit. Reimbursements you make for expenses, such as cover charges for admission to a nightclub, rent paid for a room to hold a dinner or cocktail party, or the amount you pay for parking at a sports arena, are all subject to the 50% limit. However, the cost of transportation to and from an otherwise allowable business meal or a business-related entertainment activity is not subject to the 50% limit.
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Amount subject to 50% limit.(p43)

rule
If you provide your employees with a per diem allowance only for meal and incidental expenses, the amount treated as an expense for food and beverages is the lesser of the following.
If you provide your employees with a per diem allowance that covers lodging, meals, and incidental expenses, you must treat an amount equal to the federal M&IE rate for the area of travel as an expense for food and beverages. If the per diem allowance you provide is less than the federal per diem rate for the area of travel, you can treat 40% of the per diem allowance as the amount for food and beverages.
taxmap/pubs/p535-054.htm#en_us_publink1000209172

Meal expenses when subject to "hours of service" limits.(p43)

rule
You can deduct 80% of the cost of reimbursed meals your employees consume while away from their tax home on business during, or incident to, any period subject to the Department of Transportation's "hours of service" limits.
See Publication 463 for a detailed discussion of individuals subject to the Department of Transportation's "hours of service" limits.
taxmap/pubs/p535-054.htm#en_us_publink1000209173

De minimis (minimal) fringe benefit.(p43)

rule
The 50% limit does not apply to an expense for food or beverage that is excluded from the gross income of an employee because it is a de minimis fringe benefit. See Publication 15-B for additional information on de minimis fringe benefits.
taxmap/pubs/p535-054.htm#en_us_publink1000209174

Company cafeteria or executive dining room.(p43)

rule
The cost of food and beverages you provide primarily to your employees on your business premises is deductible. This includes the cost of maintaining the facilities for providing the food and beverages. These expenses are subject to the 50% limit unless they qualify as a de minimis fringe benefit, as just discussed, or unless they are compensation to your employees (explained later).
taxmap/pubs/p535-054.htm#en_us_publink1000209175

Employee activities.(p43)

rule
The expense of providing recreational, social, or similar activities (including the use of a facility) for your employees is deductible and is not subject to the 50% limit. The benefit must be primarily for your employees who are not highly compensated.
For this purpose, a highly compensated employee is an employee who meets either of the following requirements.
  1. Owned a 10% or more interest in the business during the year or the preceding year. An employee is treated as owning any interest owned by his or her brother, sister, spouse, ancestors, and lineal descendants.
  2. Received more than $115,000 in pay for the preceding year. You can choose to include only employees who were also in the top 20% of employees when ranked by pay for the preceding year.
For example, the expenses for food, beverages, and entertainment for a company-wide picnic are not subject to the 50% limit.
taxmap/pubs/p535-054.htm#en_us_publink1000269691

Meals or entertainment treated as compensation.(p43)

rule
The 50% limit does not apply to either of the following.
  1. Expenses for meals or entertainment that you treat as:
    1. Compensation to an employee who was the recipient of the meals or entertainment, and
    2. Wages subject to withholding of federal income tax.
  2. Expenses for meals or entertainment if:
    1. A recipient of the meals or entertainment who is not your employee has to include the expenses in gross income as compensation for services or as a prize or award, and
    2. You include that amount on a Form 1099 issued to the recipient, if a Form 1099 is required.
taxmap/pubs/p535-054.htm#en_us_publink1000269692

Sales of meals or entertainment.(p43)

rule
You can deduct the cost of meals or entertainment (including the use of facilities) you sell to the public. For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is a business expense that is fully deductible. The 50% limit does not apply to this expense.
taxmap/pubs/p535-054.htm#en_us_publink1000269693

Providing meals or entertainment to general public to promote goodwill.(p43)

rule
You can deduct the cost of providing meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. The 50% limit does not apply to this expense.
taxmap/pubs/p535-054.htm#en_us_publink1000269694

Director, stockholder, or employee meetings.(p43)

rule
You can deduct entertainment expenses directly related to business meetings of your employees, partners, stockholders, agents, or directors. You can provide some minor social activities, but the main purpose of the meeting must be your company's business. These expenses are subject to the 50% limit.
taxmap/pubs/p535-054.htm#en_us_publink1000269695

Trade association meetings.(p43)

rule
You can deduct expenses directly related to and necessary for attending business meetings or conventions of certain tax-exempt organizations. These organizations include business leagues, chambers of commerce, real estate boards, and trade and professional associations.
taxmap/pubs/p535-054.htm#en_us_publink1000269696

Nonaccountable Plans(p43)

rule
A nonaccountable plan is an arrangement that does not meet the requirements for an accountable plan. All amounts paid, or treated as paid, under a nonaccountable plan are reported as wages on Form W-2. The payments are subject to income tax withholding, social security, Medicare, and federal unemployment taxes. You can deduct the reimbursement as compensation or wages only to the extent it meets the deductibility tests for employees' pay in chapter 2. Deduct the allowable amount as compensation or wages on the appropriate line of your income tax return, as provided in its instructions.