To be deductible, expenses incurred for travel, meals, and
entertainment must be ordinary and necessary expenses of 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.
The following discussion explains how you deduct any reimbursements
or allowances you make for these expenses incurred by your employees.
If you are self-employed and incur these expenses yourself, see
for information on how you can deduct them.
How you deduct a reimbursement or allowance arrangement (including
per diem allowances, discussed later) for travel, meals, and
entertainment expenses incurred by your employees depends on whether
you have an accountable plan or a nonaccountable plan. A
reimbursement or allowance arrangement is a system by which
you pay advances, reimbursements, and charges for your employees'
business expenses and they substantiate their expenses to you so you
can substantiate your deduction of the advance, reimbursement, or
charge. 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.
If you reimburse these expenses under an accountable plan, deduct
them as travel, meal, and entertainment expenses. If you reimburse
these expenses under a nonaccountable plan, you must report the
reimbursements as wages on Form W-2, Wage and Tax
Statement, and deduct them as wages. See Table
To be an accountable plan, your reimbursement or allowance
arrangement must require your employees to meet all the following
- They must have paid or incurred deductible expenses while
performing services as your employees.
- They must adequately account to you for these expenses
within a reasonable period of time.
- They must 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
- The advance is reasonably calculated not to exceed the
amount of anticipated expenses.
- You make the advance within a reasonable period of
If any expenses reimbursed under this arrangement are not
substantiated, or are an excess reimbursement that 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
Your employees must adequately account to you for their 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 diary, or a similar record in which the employee
entered each expense at or near the time the expense was incurred.
Excess reimbursement or allowance.
An 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.
Reasonable period of time.
A 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
has 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 expense was 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
How to deduct.
You can take a deduction for travel, meals, and entertainment
expenses if you reimburse your employees for these expenses under an
accountable plan. The amount you deduct for meals and entertainment,
however, may be subject to a 50% limit, discussed later. If you are a
sole proprietor, deduct the reimbursement on line 24 of Schedule C
(Form 1040). If you file a corporation income tax return, include the
reimbursement in the amount claimed on the "Other deductions"
line of Form 1120, U.S. Corporation Income Tax Return, or
Form 1120-A, U.S. Corporation Short-Form Income Tax
Return. If you file any other 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
Per Diem and Car Allowances
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.
The federal rate can be figured using any one of the following
- 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
2001, the standard mileage rate is 34 1/2 cents per mile
for each business 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 2000-48 in
Internal Revenue Bulletin 2000-49. You can read Revenue
Procedure 2000-48 at many public libraries.
Per diem allowance.
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.
Regular federal per diem rate.
The regular federal per diem rate is the highest amount the federal
government will pay to its employees for lodging, meal, and incidental
expenses (or meal and incidental expenses only) while they are
traveling away from home in a particular area. The rates are different
for different locations. Publication 1542
lists the rates in the
continental United States.
New rates went into effect on October 1, 2001. You must have chosen
to use either the old rates or the new rates for the period October 1,
2001, through December 31, 2001.
Per diem rates are available on the Internet. If you have a
computer and a modem, you can access per diem rates at
Standard meal allowance.
The federal rate for meal and incidental expense (M
& IE) is the standard meal allowance. You may pay an allowance for
meal and incidental expenses only if, for example, you reimburse
actual lodging expenses or do not reimburse lodging expenses because
there are none.
This is a simplified method of computing the federal per diem rate
for lodging and meal expenses for traveling within the continental
United States. It eliminates the need to keep a current list of the
per diem rate in effect for each city in the continental United
Under the high-low method, the per diem amount for travel during
2001 is $201 ($42 for M & IE) for certain high-cost locations. All
other areas have a per diem amount of $124 ($34 for M & IE). The
high-cost locations eligible for the $201 per diem amount under the
high-low method are listed in Publication 1542
(Revised March 2001).
The per diem amounts given above and the high-cost locations listed
in Publication 1542
(Revised March 2001) were changed for the period
October 1, 2001, through December 31, 2001. You could use the amounts
given above and the high-cost locations given in Publication 1542
this period only if you used them consistently for all employees who
were reimbursed under the high-low method. Otherwise, see Revenue
Procedure 2001-47 for the new per diem amounts and list of
Reporting per diem and car allowances.
The following paragraphs explain 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.
Allowance LESS than or EQUAL to the federal rate.
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.
Allowance MORE than the federal rate.
If your employee's allowance is more than the appropriate federal
rate, you must report the allowance as two separate items.
You 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.
You 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.
Meals and Entertainment
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.
Application of the 50% limit.
The 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 (discussed in
Taxes 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.
Amount subject to 50% limit.
If you provide your employees with a per diem allowance (discussed
earlier) 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 employee 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
The 50% limit does not apply to the food or beverages an employer
provides on an oil or gas platform or drilling rig located offshore or
in Alaska. This exception also applies to food and beverages provided
by an employer at a support camp that is near and integral to an oil
or gas platform or drilling rig located in Alaska.
Meal expenses when subject to "hours of service" limits.
You can deduct 60% of the 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
Individuals subject to the Department of Transportation's hours of
service limits include the following.
- Certain air transportation workers (such as pilots, crew,
dispatchers, mechanics, and control tower operators) who are under
Federal Aviation Administration regulations.
- Interstate truck operators and bus drivers who are under
Department of Transportation regulations.
- Certain railroad employees (such as engineers, conductors,
train crews, dispatchers, and control operations personnel) who are
under Federal Railroad Administration regulations.
- Certain merchant mariners who are under Coast Guard
De minimis (minimal) fringe benefit.
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.
Company cafeteria or executive dining room.
You can deduct the cost of food and beverages you provide primarily
to your employees on your business premises. 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 de
minimis fringe benefits, discussed in Publication 15-B, or
unless they are compensation to your employees and you treat them as
provided under a nonaccountable plan, as discussed later.
You can deduct the expense of providing recreational, social, or
similar activities (including the use of a facility) for your
employees. The benefit must be primarily for your employees who are
not highly compensated employees.
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
- Received more than $85,000 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.
These expenses are not subject to the 50% limit. For example, the
expenses for food, beverages, and entertainment for a company-wide
picnic are not subject to the 50% limit.
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.
Other Reimbursed Expenses
You may provide meals and entertainment to individuals who are not
your employees. These expenses may or may not be subject to the 50%
limit, depending on the circumstances.
If you provide a person who is not your employee with meals, goods,
services, or the use of a facility and the item you provide is
considered entertainment, you can deduct the expense only to the
extent it is included in the gross income of the recipient as
compensation for services or as a prize or award. If you are required
to include these expenses on an information return (Form
1099-MISC), you cannot claim a deduction for them unless you
file the necessary information return. For more information about when
to file Form 1099-MISC, see the General Instructions for
Forms 1099, 1098, 5498, and W-2G. These expenses are not
subject to the 50% limit.
Director, stockholder, or employee meetings.
You 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.
Trade association meetings.
You can deduct expenses directly related to and necessary for
attending business meetings or conventions of certain exempt
organizations. These organizations include business leagues, chambers
of commerce, real estate boards, and trade and professional
associations. Meal and entertainment expenses are subject to the 50%
Sale of meals or entertainment.
You can deduct the cost of providing meals, entertainment, goods
and services, or 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. These expenses are not subject to the 50% limit.
Advertising to promote goodwill.
You 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. For example, the
expense of sponsoring a television or radio show is deductible. You
can also deduct the expense of distributing free food and beverages to
the general public. These expenses are not subject to the 50% limit.
Charitable sports event.
The 50% limit does not apply to the expenses covered by a package
deal that includes a ticket to a charitable sports event if the event
meets certain conditions. See Entertainment tickets in
chapter 2 of Publication 463
for a list of the conditions a charitable
sports event must meet.