[Federal Register Volume 65, Number 17 (Wednesday, January 26, 2000)]
[Rules and Regulations]
[Pages 4121-4124]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-1382]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8864]
RIN 1545-AV87; 1545-AT97


Substantiation of Business Expenses

AGENCY:  Internal Revenue Service (IRS), Treasury.

ACTION:  Final and temporary regulations.

-----------------------------------------------------------------------

SUMMARY:  This document contains final and temporary Income Tax 
Regulations that provide rules for the substantiation of certain 
business expenses under sections 62 and 274 of the Internal Revenue 
Code (Code). Individuals and other taxpayers who claim or reimburse 
certain business expenses will be affected by these regulations.

DATES:  Effective date. These regulations are effective January 26, 
2000.
    Date of Applicability. For date of applicability, see Secs. 1.62-
2(m) and 1.274-5(m).

FOR FURTHER INFORMATION CONTACT:  Edwin B. Cleverdon, (202) 622-4920 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) 
under control number 1545-0771. Responses to this collection of 
information are required in order to deduct certain business expenses 
or exclude from income certain reimbursed business expenses of 
employees.
    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.
    The estimated annual burden per respondent or recordkeeper varies 
from 10 minutes to 20 hours, depending on individual circumstances, 
with an estimated average of 1.3 hours.
    Comments concerning the accuracy of this burden estimate and 
suggestions or reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, 
Washington, DC 20224, and to the Office of Management and Budget, Attn: 
Desk Officer for the Department of the Treasury, Office of Information 
and Regulatory Affairs, Washington, DC 20503.
    Books or records relating to this 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

    On November 6, 1985, the IRS published in the Federal Register (50 
FR 46006) temporary regulations (TD 8061) adding Sec. 1.274-5T 
regarding substantiation of expenses with documentary evidence under 
section 274(d) of the Code. A notice of proposed rulemaking (LR-145-84, 
1985-2 C.B. 809) cross-referencing the temporary regulations was 
published in the Federal Register (50 FR 46087) for the same day. The 
notice of proposed rulemaking invited comments on only those portions 
of the temporary regulations under Sec. 1.274-5T that amended 
Sec. 1.274-5 (now designated Sec. 1.274-5A) to reflect contemporaneous 
legislation.
    On March 25, 1997, the IRS published in the Federal Register (62 FR 
13988) temporary regulations (TD 8715) amending paragraphs 
(c)(2)(iii)(B) and (f)(4) of Sec. 1.274-5T. The amendments raised the 
receipt threshold from $25 to $75 and authorized 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). A notice of proposed 
rulemaking (REG-209785-95, 1997-1 C.B. 753) cross-referencing the 
temporary regulations was published in the Federal Register (62 FR 
14051) for the same day.
    On October 1, 1998, the IRS published a notice of proposed 
rulemaking (REG-122488-97, 1998-42 I.R.B. 19) in the Federal Register 
(63 FR 52660), proposing amendments to the Income Tax Regulations (26 
CFR part 1) under sections 62(c) and 274(d) of the Code regarding 
substantiation of expenses using mileage and per diem rates. 
Specifically, the amendments removed the limitation in Sec. 1.274(d)-
1(a)(3) that provides that mileage allowances prescribed in rules by 
the Commissioner are available only to the owner of a vehicle. On that 
date the IRS also published temporary Income Tax Regulations (TD 8784, 
1998-42 I.R.B. 4) under section 62(c) and 274(d) of the Code in the 
Federal Register (63 FR 52600), relating to the substantiation of 
expenses under a reimbursement or other expense allowance arrangement.
    Comments were received in response to the 1985 proposed 
regulations, and a public hearing was held on March 3, 1986. Few of the 
written comments, and none of the comments at the hearing, relate to 
the provisions in this Treasury Decision. Written comments were also 
received with respect to the 1997 proposed regulations, but no public 
hearing was requested or held. No comments were received, and no 
hearings were requested or held, with respect to the 1998 proposed 
regulations.

Summary and Discussion of Comments

    This Treasury Decision incorporates the suggestions made in the 
written comments with some exceptions. With respect to the 1985 
regulations, one commentator suggested that the definition of an 
adequate accounting in Sec. 1.274-5T(f)(4), in the case of automobile 
expense reimbursements, should be satisfied by a reimbursement based on 
data on the type of automobile and local operating and fixed costs. 
Although this suggestion has not been specifically adopted in the final 
regulations, the standard mileage rate revenue procedure provides for 
this type of substantiation. See, e.g., section 8 of Rev. Proc. 98-63, 
1998-52 I.R.B. 25.
    Another commentator suggested, inter alia, (1) adding exceptions to 
the documentary evidence requirements under Sec. 1.274-5T(c)(2)(iii) 
and (2) providing that the Commissioner, in establishing a meal 
allowance under Sec. 1.274-5T(j), may allow a specific dollar allowance 
per meal. These suggestions are not adopted because the intent of the 
regulations is to give the Commissioner the discretion to make these 
practical decisions.
    Similarly, with respect to the 1997 regulations, commentators made 
suggestions regarding the specific content of the guidance to be issued 
under the proposed regulations at Sec. 1.274-5(f)(4). We did not 
incorporate these suggestions because the regulations are designed to 
describe appropriate published guidance of general applicability, not 
the specific

[[Page 4122]]

provisions of such guidance. However, all of the comments will be taken 
into consideration by the Commissioner in issuing published guidance.

Explanation of Provisions

    This Treasury Decision adopts the revision to Sec. 1.62-2(e)(2) 
proposed in REG-122488-97, with minor changes. This Treasury Decision 
also adopts Secs. 1.274-5(c)(2)(iii), (f)(4), (g), (j), and (m) as 
proposed by LR-216-84, modified by REG-209785-95 and REG-122488-97, and 
removes and reserves the corresponding provisions in Sec. 1.274-5T. 
Finally, this Treasury Decision adopts the proposal in REG-122488-97 to 
remove Secs. 1.62-2T, 1.274(d)-1, and 1.274(d)-1T.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in EO 12866. Therefore, a 
regulatory assessment is not required. It also has been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
does not apply to these regulations. Sections 1.274-5(c)(2)(iii) and 
(f) were originally proposed by a notice of proposed rulemaking (LR-
145-84) that was issued on November 6, 1985. Therefore, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) does not apply with respect to 
those collections of information. With respect to the collection of 
information in Sec. 1.274-5(c)(iii)(B) as proposed by REG-209785-95 on 
March 25, 1997, it is hereby certified that these regulations will 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, the IRS submitted the notices of proposed 
rulemaking preceding these regulations to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

Drafting Information

    The principal author of these final and temporary regulations is 
Edwin B. Cleverdon, Office of the Assistant Chief Counsel (Income Tax 
and Accounting). However, personnel from other offices of the IRS and 
Treasury Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
an entry to read in part as follows:


    Authority:  26 U.S.C. 7805 * * *

    Section 1.274-5 also issued under 26 U.S.C. 274(d). * * *
    Par. 2. Section 1.62-2 is amended by:
    1. Revising paragraph (e)(2).
    2. Removing the last two sentences of paragraph (m).
    3. Adding a sentence to the end of paragraph (m).

    The revision and addition read as follows:


Sec. 1.62-2  Reimbursement and other expense allowance arrangements.

* * * * *
    (e) * * *
    (2) Expenses governed by section 274(d). An arrangement that 
reimburses travel, entertainment, use of a passenger automobile or 
other listed property, or other business expenses governed by section 
274(d) meets the requirements of this paragraph (e)(2) if information 
sufficient to satisfy the substantiation requirements of section 274(d) 
and the regulations thereunder is submitted to the payor. See 
Sec. 1.274-5. Under section 274(d), information sufficient to 
substantiate the requisite elements of each expenditure or use must be 
submitted to the payor. For example, with respect to travel away from 
home, Sec. 1.274-5(b)(2) requires that information sufficient to 
substantiate the amount, time, place, and business purpose of the 
expense must be submitted to the payor. Similarly, with respect to use 
of a passenger automobile or other listed property, Sec. 1.274-5(b)(6) 
requires that information sufficient to substantiate the amount, time, 
use, and business purpose of the expense must be submitted to the 
payor. See Sec. 1.274-5(g), however, which grants the Commissioner 
authority to prescribe rules permitting the amount of certain expenses 
to be deemed substantiated to the payor (in lieu of substantiating the 
actual amount of such expenses) by means of per diem or mileage rates 
for travel away from home or transportation expenses. See also 
Sec. 1.274-5(j)(1), which grants the Commissioner the authority to 
establish a method under which a taxpayer may use a specified amount 
for meals while traveling away from home in lieu of substantiating the 
actual cost of meals, and Sec. 1.274-5(j)(2), which grants the 
Commissioner the authority to establish a method under which a taxpayer 
may use mileage rates to determine the amount of the ordinary and 
necessary expenses of using a vehicle for local transportation and 
transportation to, from, and at the destination while traveling away 
from home in lieu of substantiating the actual costs. Substantiation of 
the amount of a business expense in accordance with rules prescribed 
pursuant to the authority granted by Sec. 1.274-5(g) or (j) will be 
treated as substantiation of the amount of such expense for purposes of 
this section.
* * * * *
    (m) * * * Paragraph (e)(2) of this section applies to payments made 
under reimbursement or other expense allowance arrangements received by 
an employee with respect to expenses paid or incurred after December 
31, 1997.


Sec. 1.62-2T  [Removed]

    Par. 3. Section 1.62-2T is removed.

    Par. 4. Section 1.274-5 is added to read as follows:


Sec. 1.274-5  Substantiation requirements.

    (a) and (b) [Reserved]. For further guidance, see Sec. 1.274-5T(a) 
and (b).
    (c) Rules of substantiation--(1) [Reserved]. For further guidance, 
see Sec. 1.274-5T(c)(1).
    (2) Substantiation by adequate records--(i) and (ii) [Reserved]. 
For further guidance, see Sec. 1.274-5T(c)(2)(i) and (ii).
    (iii) Documentary evidence--(A) Except as provided in paragraph 
(c)(2)(iii)(B), documentary evidence, such as receipts, paid bills, or 
similar evidence sufficient to support an expenditure, is required 
for--
    (1) Any expenditure for lodging while traveling away from home, and
    (2) Any other expenditure of $75 or more except, for transportation 
charges, documentary evidence will not be required if not readily 
available.
    (B) The Commissioner, in his or her discretion, may prescribe rules 
waiving the documentary evidence requirements in circumstances where it 
is

[[Page 4123]]

impracticable for such documentary evidence to be required. Ordinarily, 
documentary evidence will be considered adequate to support an 
expenditure if it includes sufficient information to establish the 
amount, date, place, and the essential character of the expenditure. 
For example, a hotel receipt is sufficient to support expenditures for 
business travel if it contains the following: name, location, date, and 
separate amounts for charges such as for lodging, meals, and telephone. 
Similarly, a restaurant receipt is sufficient to support an expenditure 
for a business meal if it contains the following: name and location of 
the restaurant, the date and amount of the expenditure, the number of 
people served, and, if a charge is made for an item other than meals 
and beverages, an indication that such is the case. A document may be 
indicative of only one (or part of one) element of an expenditure. 
Thus, a cancelled check, together with a bill from the payee, 
ordinarily would establish the element of cost. In contrast, a 
cancelled check drawn payable to a named payee would not by itself 
support a business expenditure without other evidence showing that the 
check was used for a certain business purpose.
    (iv) and (v) [Reserved]. For further guidance, see Sec. 1.274-
5T(c)(2)(iv) and (v).
    (d) and (e) [Reserved]. For further guidance, see Sec. 1.274-5T(d) 
and (e).
    (f) Reporting and substantiation of expenses of certain employees 
for travel, entertainment, gifts, and with respect to listed property--
(1) through (3) [Reserved]. For further guidance, see Sec. 1.274-
5T(f)(1) through (3).
    (4) Definition of an adequate accounting to the employer--(i) In 
general. For purposes of this paragraph (f) an adequate accounting 
means the submission to the employer of an account book, diary, log, 
statement of expense, trip sheet, or similar record maintained by the 
employee in which the information as to each element of an expenditure 
or use (described in paragraph (b) of this section) is recorded at or 
near the time of the expenditure or use, together with supporting 
documentary evidence, in a manner that conforms to all the adequate 
records requirements of paragraph (c)(2) of this section. An adequate 
accounting requires that the employee account for all amounts received 
from the employer during the taxable year as advances, reimbursements, 
or allowances (including those charged directly or indirectly to the 
employer through credit cards or otherwise) for travel, entertainment, 
gifts, and the use of listed property. The methods of substantiation 
allowed under paragraph (c)(4) or (c)(5) of this section also will be 
considered to be an adequate accounting if the employer accepts an 
employee's substantiation and establishes that such substantiation 
meets the requirements of paragraph (c)(4) or (c)(5). For purposes of 
an adequate accounting, the method of substantiation allowed under 
paragraph (c)(3) of this section will not be permitted.
    (ii) Procedures for adequate accounting without documentary 
evidence. The Commissioner may, in his or her discretion, prescribe 
rules under which an employee may make an adequate accounting to an 
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.
    (5) [Reserved]. For further guidance, see Sec. 1.274-5T(f)(5).
    (g) Substantiation by reimbursement arrangements or per diem, 
mileage, and other traveling allowances--(1) In general. The 
Commissioner may, in his or her discretion, prescribe rules in 
pronouncements of general applicability under which allowances for 
expenses described in paragraph (g)(2) of this section will, if in 
accordance with reasonable business practice, be regarded as equivalent 
to substantiation by adequate records or other sufficient evidence, for 
purposes of paragraph (c) of this section, of the amount of the 
expenses and as satisfying, with respect to the amount of the expenses, 
the requirements of an adequate accounting to the employer for purposes 
of paragraph (f)(4) of this section. If the total allowance received 
exceeds the deductible expenses paid or incurred by the employee, such 
excess must be reported as income on the employee's return. See 
paragraph (j)(1) of this section relating to the substantiation of meal 
expenses while traveling away from home, and paragraph (j)(2) of this 
section relating to the substantiation of expenses for the business use 
of a vehicle.
    (2) Allowances for expenses described. An allowance for expenses is 
described in this paragraph (g)(2) if it is a--
    (i) Reimbursement arrangement covering ordinary and necessary 
expenses of traveling away from home (exclusive of transportation 
expenses to and from destination);
    (ii) Per diem allowance providing for ordinary and necessary 
expenses of traveling away from home (exclusive of transportation costs 
to and from destination); or
    (iii) Mileage allowance providing for ordinary and necessary 
expenses of local transportation and transportation to, from, and at 
the destination while traveling away from home.
    (h) [Reserved]. For further guidance, see Sec. 1.274-5T(h).
    (i) [Reserved].
    (j) Authority for optional methods of computing certain expenses--
(1) Meal expenses while traveling away from home. The Commissioner may 
establish a method under which a taxpayer may use a specified amount or 
amounts for meals while traveling away from home in lieu of 
substantiating the actual cost of meals. The taxpayer will not be 
relieved of the requirement to substantiate the actual cost of other 
travel expenses as well as the time, place, and business purpose of the 
travel. See paragraphs (b)(2) and (c) of this section.
    (2) Use of mileage rates for vehicle expenses. The Commissioner may 
establish a method under which a taxpayer may use mileage rates to 
determine the amount of the ordinary and necessary expenses of using a 
vehicle for local transportation and transportation to, from, and at 
the destination while traveling away from home in lieu of 
substantiating the actual costs. The method may include appropriate 
limitations and conditions in order to reflect more accurately vehicle 
expenses over the entire period of usage. The taxpayer will not be 
relieved of the requirement to substantiate the amount of each business 
use (i.e., the business mileage), or the time and business purpose of 
each use. See paragraphs (b)(2) and (c) of this section.
    (k) and (l) [Reserved]. For further guidance, see Sec. 1.274-5T(k) 
and (l).
    (m) Effective date. This section applies to expenses paid or 
incurred after December 31, 1997.

    Par. 5. Section 1.274-5T is amended by:
    1. Revising paragraphs (c)(2)(iii), (f)(4), (g) and (j).
    2. Adding a sentence at the end of paragraph (m).

    The revision and addition read as follows:


Sec. 1.274-5T  Substantiation requirements.

* * * * *
    (c) * * *
    (2) * * *

[[Page 4124]]

    (iii) [Reserved]. For further guidance, see Sec. 1.274-
5(c)(2)(iii).
* * * * *
    (f) * * *
    (4) [Reserved]. For further guidance, see Sec. 1.274-5(f)(4).
* * * * *
    (g) [Reserved]. For further guidance, see Sec. 1.274-5(g).
* * * * *
    (j) [Reserved]. For further guidance, see Sec. 1.274-5(j).
* * * * *
    (m) Effective date. * * * Paragraphs (c)(2)(iii), (f)(4), (g), and 
(j) of this section apply to expenses paid or incurred after December 
31, 1997.


Sec. 1.274(d)-1  [REMOVED]

    Par. 6. Section 1.274(d)-1 is removed.


Sec. 1.274(d)-1T  [REMOVED]

    Par. 7. Section 1.274(d)-1T is removed.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 8. The authority citation for part 602 continues to read as 
follows:

    Authority:  26 U.S.C. 7805.

    Par. 9. In Sec. 602.101, paragraph (b) is amended by adding the 
following entry to the table:


Sec. 602.101  OMB Control numbers

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                          Current OMB
  CFR part or section where identified and described      control No.
------------------------------------------------------------------------
 
*                  *                  *                  *
                  *                  *                  *
1.274-5..............................................          1545-0771
 
*                  *                  *                  *
                  *                  *                  *
------------------------------------------------------------------------


Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: December 28, 1999.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 00-1382 Filed 1-21-00; 3:06 pm]
BILLING CODE 4830-01-U