Publication 535
taxmap/pubs/p535-055.htm#en_us_publink1000209144taxmap/pubs/p535-055.htm#en_us_publink1000209146Standard mileage rate.
(p40)For 2012, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for business use is 55.5 cents per mile. For more information, see
Car and truck expenses under
Miscellaneous Expenses.
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/p535-055.htm#TXMP6177a1f0Useful 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/p535-055.htm#en_us_publink1000209148The 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.
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:
- An accountable plan, or
- A nonaccountable plan.
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.
An accountable plan requires your employees to meet all of the following requirements. Each employee
must:
- Have paid or incurred deductible expenses while performing services as your
employee,
- Adequately account to you for these expenses within a reasonable period of time,
and
- 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.
- The advance is reasonably calculated not to exceed the amount of anticipated
expenses.
- You make the advance within a reasonable period of time of your employee paying or incurring the
expense.
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.
taxmap/pubs/p535-055.htm#en_us_publink1000209151Your 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/p535-055.htm#en_us_publink1000209152An 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/p535-055.htm#en_us_publink1000209153A 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.
- You give an advance within 30 days of the time the employee pays or incurs the
expense.
- Your employees adequately account for their expenses within 60 days after the expenses were paid or
incurred.
- Your employees return any excess reimbursement within 120 days after the expenses were paid or
incurred.
- 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.
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 deductionsline 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/p535-055.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
plan | The entire amount as wages in box 1. |
|
No reimbursement plan
| The entire amount as wages in box 1. |
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/p535-055.htm#en_us_publink1000209158The federal rate can be figured using any one of the following methods.
- For per diem amounts:
- The regular federal per diem rate.
- The standard meal allowance.
- The high-low rate.
- For car expenses:
- The standard mileage rate.
- A fixed and variable rate (FAVR).
Your employee is considered to have accounted to you for car expenses that do not exceed the standard mileage rate. For 2012, the standard business mileage rate is 55.5 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 2012-1, available at
www.irs.gov/irb/2012-02_IRB/ar09.html.
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/p535-055.htm#en_us_publink1000209161The 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:
- Lodging expense, and
- Meal and incidental expense (M & IE).
The rates are different for different locations. Publication 1542 lists the rates in the continental United States.
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:
- You pay the employee for actual expenses for lodging based on receipts submitted to
you,
- You provide for the lodging,
- You pay for the actual expense of the lodging directly to the
provider,
- You do not have a reasonable belief that lodging expenses were incurred by the employee,
or
- The allowance is computed on a basis similar to that used in computing the employee's wages (that is, number of hours worked or miles
traveled).
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 December of 2012 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.
For more information about the high-low method, see Notice 2012-63, available at
www.irs.gov/irb/2012-42_IRB/ar12.html. See Publication 1542 (available on the Internet at IRS.gov) for the current per diem rates for all
locations.
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.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.
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/p535-055.htm#en_us_publink1000209168Under 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.
taxmap/pubs/p535-055.htm#en_us_publink1000209169The 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/p535-055.htm#en_us_publink1000209170Taxes 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.
taxmap/pubs/p535-055.htm#en_us_publink1000209171If 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.
- The per diem allowance.
- The federal rate for M & IE.
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/p535-055.htm#en_us_publink1000209172You 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.
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.
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/p535-055.htm#en_us_publink1000209175The 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.
- 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.
- 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/p535-055.htm#en_us_publink1000269691The 50% limit does not apply to either of the following.
- Expenses for meals or entertainment that you treat as:
- Compensation to an employee who was the recipient of the meals or entertainment,
and
- Wages subject to withholding of federal income tax.
- Expenses for meals or entertainment if:
- 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
- You include that amount on a Form 1099 issued to the recipient, if a Form 1099 is
required.
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/p535-055.htm#en_us_publink1000269693You 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/p535-055.htm#en_us_publink1000269694You 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/p535-055.htm#en_us_publink1000269695You 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/p535-055.htm#en_us_publink1000269696A 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.
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