[Federal Register Volume 62, Number 57 (Tuesday, March 25, 1997)]
[Rules and Regulations]
[Pages 13988-13991]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-7095]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 8715]
RIN 1545-AT98
Substantiation of Business Expenses for Travel, Entertainment,
Gifts and Listed Property
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains amendments to temporary regulations
relating to the requirement that business expenses for travel,
entertainment, gifts, or listed property be substantiated by
documentary evidence (such as a receipt). The regulations affect
persons making or receiving reimbursements for travel, entertainment,
gifts, or listed property. The text of these temporary regulations also
serves as the text of the proposed regulations cross-referenced in the
notice of proposed rulemaking in the Proposed Rules section of this
issue of the Federal Register.
DATES: These temporary regulations are effective March 25, 1997.
Applicability: These temporary regulations are applicable to
expenses paid or incurred after September 30, 1995.
FOR FURTHER INFORMATION CONTACT: Donna M. Crisalli at (202) 622-4920
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These regulations are being issued without prior notice and public
comment pursuant to the Administrative Procedure Act (5 U.S.C. 553).
For this reason, the collection of information contained in these
regulations has been reviewed and, pending receipt and evaluation of
public comments, approved by the Office of Management and Budget (OMB)
under control number 1545-0771. Responses to this collection of
information are required for a taxpayer to deduct certain business
expenses or to substantiate certain reimbursements of business
expenses.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.
For further information concerning this collection of information,
and where to submit comments on the collection of information and the
accuracy of the estimated burden, and suggestions for reducing the
burden, please refer to the preamble in the cross-reference notice of
proposed rulemaking published in the Proposed Rules section of this
issue of the Federal Register.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background and Explanation of Provisions
Receipt Threshold
Section 274(d) disallows a trade or business deduction under
section 162 for any traveling (including meals and lodging),
entertainment, gift, or listed property expense, unless the taxpayer
substantiates the elements of the expense by adequate records or by
sufficient evidence. Under Sec. 1.274-5T(c) of the temporary Income Tax
Regulations, a taxpayer must maintain two types of records to satisfy
the ``adequate records'' requirement: (1) a summary of expenses
(account book, diary, log, statement of expense, trip sheets, or other
similar record), sometimes called an expense account or expense
voucher, and (2) documentary evidence (such as receipts or paid bills).
Together, these records must establish the elements of amount, time,
place, and business purpose (and for gifts and entertainment, business
relationship of
[[Page 13989]]
recipient or persons entertained) for each expenditure or use.
Section 1.274-5T(c)(2)(iii) generally requires that a taxpayer have
a receipt or other documentary evidence to substantiate (A) any
expenditure for lodging and (B) any other expenditure of $25 or more.
In Notice 95-50 (1995-2 C.B. 333), the IRS announced that it would
raise the receipt threshold of Sec. 1.274-5T(c)(2)(iii)(B) from $25 to
$75, effective for expenses incurred on or after October 1, 1995. The
temporary regulations effect this amendment by changing ``$25'' in
Sec. 1.274-5T(c)(2)(iii)(B) to ``$75.'' This change is applicable to
both deductions and reimbursement arrangements and is expected to
reduce the recordkeeping burden on affected taxpayers, including
individuals and small businesses.
Definition of an ``Adequate Accounting'' to the Employer
An employee who is reimbursed under a reimbursement or other
expense allowance arrangement for expenses covered by section 274(d)
must make an ``adequate accounting'' to the employer for the reimbursed
expenses. Section 1.274-5T(f)(4) specifies that, as part of an adequate
accounting, the employee must submit substantiation to the employer
that satisfies the requirements of Sec. 1.274-5T(c). Notice 95-50 also
solicited comments on whether changes should be made to the
substantiation requirements of the adequate accounting rules in
Sec. 1.274-5T. Comments received related primarily to the adequate
accounting rules and the substantiation requirements in general.
1. Submission and Retention of Documentary Evidence
A number of commentators, particularly federal government agencies,
complained of the administrative burden and cost of storing large
quantities of paper receipts. Some comments proposed that the employer
should be allowed to dispose of the documentary evidence after an
employee has made an adequate accounting, or return the documentary
evidence to the employee for retention. Other comments suggested that
submission by an employee of an expense voucher alone, without
documentary evidence, should be considered an adequate accounting.
With the increase in the receipt threshold to $75, and the use of
electronic document transmission and retention (discussed below), the
necessity for storing large quantities of paper records is
significantly reduced. Nonetheless, the temporary regulations respond
to the concerns expressed by these comments by amending Sec. 1.274-
5T(f)(4) to authorize the Commissioner to prescribe rules modifying the
substantiation requirements for an adequate accounting by an employee
to an employer. Under the amendment, the Commissioner could publish
rules defining the circumstances (including the use of specified
internal controls) under which an employee may make an adequate
accounting to his employer by submitting an expense account alone,
without the necessity of submitting documentary evidence (such as
receipts). This change is expected to reduce the recordkeeping burden
for employers and employees. These rules would not change the
substantiation requirements of Sec. 1.274-5T(c) for deductions.
2. Maintenance of Adequate Records in Electronic Form
Some commentators suggested that taxpayers should be permitted to
obtain and maintain records substantiating expenses under section
274(d) in electronic form. The temporary regulations make no change to
the current regulations, which do not require that the records be in
paper form. Rev. Proc. 91-59 (1991-2 C.B. 841), provides procedures for
maintaining tax records in electronic form. Section 3.08 of Rev. Proc.
91-59 states that the procedures apply to documentation required by
section 274(d).
3. Types of Records That Constitute Acceptable Documentary Evidence
Some commentators suggested that credit card charge records should
be considered acceptable documentary evidence of travel expenses,
including lodging. They noted, however, that Sec. 1.274-5T(c)(2)(iii)
requires that documentary evidence of lodging must show separate
amounts for charges such as lodging, meals, and telephone calls. A
credit card statement or record of charge, unlike a hotel bill,
normally will not segregate lodging and other expenses, such as meals
and entertainment subject to the section 274(n) partial deduction
disallowance, or personal expenses (such as personal phone calls or
gift purchases) that may not be deducted. Therefore, such a credit card
statement or record of charge alone will not constitute acceptable
documentary evidence of a lodging expense.
The commentators proposed addressing this problem by using
statistical sampling, conducted either by the IRS or by taxpayers, to
establish a breakdown of expenses on hotel bills. One comment suggested
that sampling could form a basis for a ``safe harbor'' percentage or
percentages (e.g., by industry or size of company) of hotel bills that
would be deemed to represent the various types of possible expenses.
Another comment suggested that the IRS adopt a mechanical test based on
statistical sampling to make a reasonable allocation of the total hotel
charge to meals.
The temporary regulations make no change to the current documentary
evidence requirements for lodging expenses. Because of the large number
of expenses that can be charged to hotel bills, and extensive variation
from traveler to traveler in the types of expenses charged to hotel
bills, any attempt to establish percentages for allocating hotel bills
to lodging and other fully deductible business expenses, meals and
entertainment, and personal expenses is considered impracticable.
A comment requested that the IRS clarify whether statements
provided to travelers by airlines in lieu of tickets can constitute
documentary evidence of travel. The current regulations are
sufficiently flexible to permit use of a variety of forms of
documentary evidence.
Other Comments in Response to Notice 95-50
1. Substantiation of Business Purpose
A commentator suggested that the regulations be revised to permit
an employee to initially substantiate business purpose to the employer
orally, for later entry into the expense processing system. The current
regulations do not preclude an initial oral substantiation of business
purpose which is reduced to writing no later than the time of the
employee's final accounting to the employer.
2. Post-Expenditure Verification Procedures
A comment suggested that the regulations be revised to permit an
employer to conduct a post-expenditure review of only a statistical
sampling, as opposed to 100%, of expense vouchers.
Section 1.274-5T(f)(5)(iii) states that an employee who makes an
adequate accounting to his employer will not again be required to
substantiate such expenses, unless the employer's accounting procedures
are not adequate or it cannot be determined that such procedures are
adequate. The district director will determine whether the employer's
accounting procedures are adequate by considering all the facts and
circumstances, including the employer's use of internal controls. The
[[Page 13990]]
employer's accounting procedures should include a requirement that an
expense account be verified and approved by a reasonable person other
than the person incurring the expense. To the extent the employer fails
to maintain adequate accounting procedures, the district director may
require the employee to separately substantiate his expense account
information.
Section 1.274-5T(f)(5)(iii) cites post-expenditure review of
employees' expense accounts as an internal control that should normally
be employed. However, whether the employer's post-expenditure review
procedures are appropriate is a matter within the discretion of the
district director, based on a review of all the facts and
circumstances.
3. De Minimis Exception to Substantiation Requirements
A comment proposed that employees receiving $1000 or less per year
in reimbursed expenses be exempted from the requirement to substantiate
the elements of the expenses, other than business purpose, to the
employer. In view of the other changes made by the temporary
regulations that will lessen a taxpayer's recordkeeping burden, such as
the increase in the receipt threshold, the temporary regulations do not
incorporate this suggestion.
4. Department of Labor Substantiation Requirements for Plan Trustees
A comment requested the IRS to coordinate with the Department of
Labor to establish common substantiation requirements under ERISA for
travel by multi-employer plan trustees. Modifications to conform the
substantiation requirements under ERISA to those provided in the
temporary regulations are outside the scope of the section 274(d)
regulations.
5. Increase in Limit on Deduction for Gifts
A comment requested that the $25 limit on the deduction for gifts
contained in section 274(b) be increased to $75. The IRS has no
discretion to raise this statutory limit.
6. Use of Full Federal Per Diem Method to Substantiate Travel for
Deduction Purposes
A comment suggested that self-employed individuals and unreimbursed
employees should be entitled to substantiate lodging expenses for
deduction purposes by means of the ``high-low'' per diem method. Rev.
Proc. 96-64 (1996-53 I.R.B. 52), permits this substantiation method for
employee reimbursements only. This suggestion is outside the scope of
this revision to the temporary regulations.
Special Analyses
It has been determined that these temporary regulations are not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It is hereby certified that
these regulations do not have a significant economic impact on a
substantial number of small entities. This certification is based on
the fact that, by increasing the receipt threshold from $25 to $75,
these regulations reduce the existing recordkeeping requirements of
taxpayers, including small entities. The regulations do not otherwise
significantly alter the reporting or recordkeeping duties of small
entities. Therefore, a Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Internal Revenue Code, these
temporary regulations will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on their
impact on small business.
Drafting Information
The principal author of these regulations is Donna M. Crisalli,
Office of the Assistant Chief Counsel (Income Tax and Accounting).
However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.274-5T also issued under 26 U.S.C. 274(d). * * *
Par. 2. An undesignated centerheading is added immediately
following Sec. 1.280H-1T to read as follows:
Taxable Years Beginning Prior to January 1, 1986
Sec. 1.274-5 [Redesignated as Sec. 1.274-5A]
Par. 3. Section 1.274-5 is redesignated as Sec. 1.274-5A and added
immediately following the undesignated centerheading ``Taxable Years
Beginning Prior to January 1, 1986''.
Par. 4. Section 1.274-5T is amended by:
1. Revising the first sentence of paragraph (c)(2)(iii)(B).
2. Redesignating the text of paragraph (f)(4) as paragraph
(f)(4)(i).
3. Adding a paragraph heading for paragraph (f)(4)(i).
4. Adding paragraphs (f)(4)(ii) and (f)(4)(iii).
The revisions and additions read as follows:
Sec. 1.274-5T Substantiation requirements (temporary).
* * * * *
(c) * * *
(2) * * *
(iii) * * *
(B) Any other expenditure of $75 or more ($25 or more for
expenditures incurred before October 1, 1995) except, for
transportation charges, documentary evidence will not be required if
not readily available, provided, however, that the Commissioner, in his
discretion, may prescribe rules waiving such requirements in
circumstances where he determines it is impracticable for such
documentary evidence to be required. * * *
* * * * *
(f) * * *
(4) * * * (i) In general. * * *
(ii) Procedures for adequate accounting without documentary
evidence. The Commissioner may, in his discretion, prescribe rules
under which an employee may make an adequate accounting to his employer
by submitting an account book, log, diary, etc., alone, without
submitting documentary evidence.
(iii) Employer. For purposes of this section, the term employer
includes an agent of the employer or a third party payor who pays
amounts to an employee under a reimbursement or other expense allowance
arrangement.
* * * * *
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 5. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par. 6. In Sec. 602.101, paragraph (c) is amended by:
1. Removing the following entry from the table:
[[Page 13991]]
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Current OMB
CFR part or section where identified and described control No.
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* * * * *
1.274-5.................................................... 1545-0139
1545-0771
* * * * *
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2. Adding an entry in numerical order to the table to read as
follows:
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Current OMB
CFR part or section where identified and described control No.
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* * * * *
1.274-5A................................................... 1545-0139
1545-0771
* * * * *
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Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: February 14, 1997.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 97-7095 Filed 3-24-97; 8:45 am]
BILLING CODE 4830-01-U
