For Tax Professionals  
T.D. 8864 January 27, 2000

Substantiation of Business Expenses

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1 and 602 [TD 8864] RIN 1545-
AV87; 1545-AT97

TITLE: 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 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 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 1.274-5T that amended
1.274-5 (now designated 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 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
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 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 1.274- 5T(c)(2)(iii)
and (2) providing that the Commissioner, in establishing a meal
allowance under 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 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 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 1.62-2(e)(2) proposed
in REG-122488-97, with minor changes. This Treasury Decision also
adopts 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 1.274-5T.
Finally, this Treasury Decision adopts the proposal in REG-122488-97
to remove 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
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: 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 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, 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, 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 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
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 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 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.

1.62-2T [REMOVED] Par. 3. Section 1.62-2T is removed. Par. 4.
Section 1.274-5 is added to read as follows:

1.274-5 Substantiation requirements. (a) and (b) [Reserved]. For
further guidance, see 1.274- 5T(a) and (b).

(c) Rules of substantiation--(1) [Reserved]. For further guidance,
see 1.274-5T(c)(1).

(2) Substantiation by adequate records--(i) and (ii) [Reserved]. For
further guidance, see 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 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 1.274- 5T(c)(2)
(iv) and (v).

(d) and (e) [Reserved]. For further guidance, see 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
1.274-5T(f)(1) through (3).

(4) Definition of an adequate accounting to the employer B

(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 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 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.14 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 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: 1.274-5T Substantiation requirements.

* * * * *

(c) * * *

(2) * * *

(iii) [Reserved]. For further guidance, see 1.274- 5(c)(2)(iii).

* * * * *

(f)* * *

(4) [Reserved]. For further guidance, see 1.274-5(f)(4).

* * * * *

(g) [Reserved]. For further guidance, see 1.274-5(g).

* * * * *

(j) [Reserved]. For further guidance, see 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.

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

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 602.101, paragraph (b) is amended by adding the
following entry to the table: 602.101 OMB Control numbers

* * * * *

(b) * * *

CFR part or section where Current OMB identified and described
control Number

* * * * *

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


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