Table of Contents
- Introduction
- Topics - This chapter discusses:
- Useful Items - You may want to see:
- Reimbursement of Travel, Meals, and Entertainment
- Miscellaneous Expenses
- Meaning of generally enforced.
- Kickbacks.
- Form 1099-MISC.
- Exception.
- Tax preparation fees.
- Covered executive branch official.
- Exceptions to denial of deduction.
- Indirect political contributions.
- Type of deduction.
- Repayment—$3,000 or less.
- Repayment—over $3,000.
- Method 1.
- Method 2.
- Repayment does not apply.
- Year of deduction (or credit).
- Telephone.
This chapter covers business expenses that may not have been explained to you, as a business owner, in previous chapters of this publication.
-
Travel, meals, and entertainment
-
Bribes and kickbacks
-
Charitable contributions
-
Education expenses
-
Lobbying expenses
-
Penalties and fines
-
Repayments (claim of right)
-
Other miscellaneous expenses
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.
The following discussion explains how to handle any reimbursements or allowances you may provide for travel, meals, and entertainment expenses when incurred by your employees. 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 charges for travel, meals, and entertainment expenses incurred by your employees during the ordinary course of business. Upon satisfying your established substantiation requirements, you can deduct the allowable amount on your tax return. Because of differences between accounting methods and tax law, these amounts may not be the same. For example, you may deduct 100% of the cost of meals on your business books and records. However, for tax purposes, only 50% of these costs are allowed by law as a tax deduction.
A reimbursement or allowance arrangement (including per diem allowances, discussed later) depends on whether you have: (1) an accountable plan or (2) a nonaccountable plan. If you reimburse these expenses under an accountable plan, then you can deduct the amount allowable to the extent of the tax law as travel, meal, and entertainment expenses on your tax return.
If you reimburse these expenses under a nonaccountable plan, then you must 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 attributable to reimbursement and report it accordingly. See Table 11-1, Reporting Reimbursements.
An accountable plan, requires your employees to meet all of the following requirements. They must:
-
Have paid or incurred deductible expenses while performing services as your employees,
-
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.
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 are not allowed to deduct these expenses as reimbursed under an accountable plan. Instead, treat the reimbursed expenses as paid under a nonaccountable plan, discussed later.
-
You give an advance within 30 days of the time the employee has incurred 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.
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 may 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.
-
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).
-
-
Lodging expense, and
-
Meal and incidental expense (M & IE).
-
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 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).
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.
-
The per diem allowance.
-
The federal rate for M & IE.
-
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 $100,000 in pay for the preceding year. You may choose to include only employees who were also in the top 20% of employees when ranked by pay for the preceding year.
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.
Generally, amounts paid for meals, entertainment, and amusement provided to individuals who are not your employees are not subject to the 50% limit. Such activities must be directly related to the active conduct of your trade or business. Examples include:
-
Amounts paid for meals, goods, services, or the use of a facility. You are allowed a deduction only to the extent it is included in the gross income of the recipient as compensation for services or as a prize or award.
-
Expenses that exceed $600 and are required to be reported on an information return, for example, Form 1099-MISC. See the General Instructions for Forms 1099, 1098, 5498, and W-2G for more information about reporting requirements.
-
The cost of providing meals, entertainment, goods and services, or use of facilities you sell to the public. For example, if you operate 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 cost of providing meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community is fully deductible.
In addition to travel, meal, and entertainment expenses, other miscellaneous expenses that are deductible, subject to limitations, include:
-
Amounts paid for the reasonable cost of advertising that are directly related to your business activities. Generally, amounts paid to influence legislation (i.e., lobbying) are not deductible for tax purposes. See Lobbying expenses, later.
-
Amounts paid that are directly related to the conduct of business meetings of your employees, partners, stockholders, agents, or directors. Some minor social activities may be allowed, however, these expenses are subject to the 50% limit.
-
Amounts paid that are 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 estates boards, and trade and professional associations.
Example.
You made a $100,000 donation to a committee organized by the local Chamber of Commerce to bring a convention to your city, intended to increase business activity, including yours. Your payment is not a charitable contribution. However, you may deduct it as a business expense.
See Publication 526 for a discussion of donated inventory, including capital gain property.
-
Boards of trade.
-
Business leagues.
-
Chambers of commerce.
-
Civic or public service organizations.
-
Professional organizations such as bar associations and medical associations.
-
Real estate boards.
-
Trade associations.
-
The amount you received or accrued for damages in the tax year reduced by the amount you paid or incurred in the year to recover that amount.
-
Your losses from the injury you have not deducted.
-
Contingent on productivity, use, or disposition of the item,
-
Payable at least annually for the entire term of the transfer agreement, and
-
Substantially equal in amount (or payable under a fixed formula).
-
A physical or mental disability (for example, blindness or deafness) that functionally limits your being employed.
-
A physical or mental impairment that substantially limits one or more of your major life activities.
-
Your work clearly requires the expense for you to satisfactorily perform that work.
-
The goods or services purchased are clearly not needed or used, other than incidentally, in your personal activities.
-
Their treatment is not specifically provided for under other tax law provisions.
-
Influencing legislation.
-
Participating in or intervening in any political campaign for, or against, any candidate for public office.
-
Attempting to influence the general public, or segments of the public, about elections, legislative matters, or referendums.
-
Communicating directly with covered executive branch officials (defined later) in any attempt to influence the official actions or positions of those officials.
-
Researching, preparing, planning, or coordinating any of the preceding activities.
-
The organization conducts lobbying activities on matters of direct financial interest to your business.
-
A principal purpose of your contribution is to avoid the rules discussed earlier that prohibit a business deduction for lobbying expenses.
-
The President.
-
The Vice President.
-
Any officer or employee of the White House Office of the Executive Office of the President and the two most senior level officers of each of the other agencies in the Executive Office.
-
Any individual who:
-
Is serving in a position in Level I of the Executive Schedule under section 5312 of title 5, United States Code,
-
Has been designated by the President as having Cabinet-level status, or
-
Is an immediate deputy of an individual listed in item (a) or (b).
-
-
Expenses of appearing before, or communicating with, any local council or similar governing body concerning its legislation (local legislation) if the legislation is of direct interest to you or to you and an organization of which you are a member. An Indian tribal government is treated as a local council or similar governing body.
-
Any in-house expenses for influencing legislation and communicating directly with a covered executive branch official if those expenses for the tax year do not exceed $2,000 (excluding overhead expenses).
-
Expenses incurred by taxpayers engaged in the trade or business of lobbying (professional lobbyists) on behalf of another person (but does apply to payments by the other person to the lobbyist for lobbying activities).
-
Paid because of a conviction for a crime or after a plea of guilty or no contest in a criminal proceeding.
-
Paid as a penalty imposed by federal, state, or local law in a civil action, including certain additions to tax and additional amounts and assessable penalties imposed by the Internal Revenue Code.
-
Paid in settlement of actual or possible liability for a fine or penalty, whether civil or criminal.
-
Forfeited as collateral posted for a proceeding that could result in a fine or penalty.
-
Fines for violating city housing codes.
-
Fines paid by truckers for violating state maximum highway weight laws.
-
Fines for violating air quality laws.
-
Civil penalties for violating federal laws regarding mining safety standards and discharges into navigable waters.
-
Legal fees and related expenses to defend yourself in a prosecution or civil action for a violation of the law imposing the fine or civil penalty.
-
Court costs or stenographic and printing charges.
-
Compensatory damages paid to a government.
-
Advertising in a convention program of a political party, or in any other publication if any of the proceeds from the publication are for, or intended for, the use of a political party or candidate.
-
Admission to a dinner or program (including, but not limited to, galas, dances, film presentations, parties, and sporting events) if any of the proceeds from the function are for, or intended for, the use of a political party or candidate.
-
Admission to an inaugural ball, gala, parade, concert, or similar event if identified with a political party or candidate.
-
Reconditioning floors (but not replacement),
-
Repainting the interior and exterior walls of a building,
-
Cleaning and repairing roofs and gutters, and
-
Fixing plumbing leaks (but not replacement of fixtures).
-
Figure your tax for 2007 without deducting the repaid amount.
-
Refigure your tax from the earlier year without including in income the amount you repaid in 2007.
-
Subtract the tax in (2) from the tax shown on your return for the earlier year. This is the amount of your credit.
-
Subtract the answer in (3) from the tax for 2007 figured without the deduction (step 1).
Example.
For 2006, you filed a return and reported your income on the cash method. In 2006, you repaid $5,000 included in your 2006 gross income under a claim of right. Your filing status in 2007 and 2006 is single. Your income and tax for both years are as follows:
2006
With Income |
2006
Without Income |
|||
Taxable Income | $15,000 | $10,000 | ||
Tax | $ 1,876 | $ 1,126 | ||
2007
Without Deduction |
2007
With Deduction |
|||
Taxable Income | $49,950 | $44,950 | ||
Tax | $8,918 | $ 7,668 |
Your tax under Method 1 is $7,668. Your tax under Method 2 is $8,168, figured as follows:
Tax previously determined for 2006 | $ 1,876 | |
Less: Tax as refigured | - 1,126 | |
Decrease in 2006 tax | $ 750 | |
Regular tax liability for 2007 | $8,918 | |
Less: Decrease in 2006 tax | - 750 | |
Refigured tax for 2007 | $ 8,168 |
Because you pay less tax under Method 1, you should take a deduction for the repayment in 2007.
-
Deductions for bad debts.
-
Deductions from sales to customers, such as returns and allowances, and similar items.
-
Deductions for legal and other expenses of contesting the repayment.
-
You do not keep a record of when they are used.
-
You do not take an inventory of the amount on hand at the beginning and end of the tax year.
-
This method does not distort your income.
More Online Publications |