PORTFOLIO

Travel and Transportation Expenses — Deduction and Recordkeeping Requirements (Portfolio 519)

Be a trusted advisor to your clients with Bloomberg BNA Tax Portfolios. This portfolio explains the substantive and procedural rules for deducting travel, transportation and commuting expenses. It analyzes the problems which arise in determining the deductibility of travel expenses incurred in an employment or self-employment context, including whether a particular expense is properly characterized as a personal or a business expenditure and whether the expense relates to travel away from home. In addition, the Portfolio examines the conditions under which commuting costs and nonbusiness travel expenses can be deducted.

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DESCRIPTION

Travel and Transportation Expenses – Deductions and Recordkeeping Requirements explains the substantive and procedural rules for deducting travel, transportation and commuting expenses. It analyzes the problems which arise in determining the deductibility of travel expenses incurred in an employment or self-employment context, including whether a particular expense is properly characterized as a personal or a business expenditure and whether the expense relates to travel away from home. In addition, the Portfolio examines the conditions under which commuting costs and nonbusiness travel expenses can be deducted

 

 

 

Specifically, the Portfolio contains an exhaustive analysis of the deductions available for the business use of automobiles and other types of vehicles, as well as the limitations on the deductibility of such expenses, in addition to an examination of the tax consequences of employee use of employer-provided transportation and other fringe benefits. Finally, because the taxpayer is required to establish the expenses claimed as deductions, the Portfolio discusses in detail all applicable substantiation rules and reporting requirements.

 

The information and analysis in this Portfolio will assist the practitioner or business person in ensuring that all of the requirements for deductibility are met. This is vital because, unless strict attention is paid to the requirements of the statute and regulations, the employer and the employee may both lose the benefit of otherwise allowable deductions.

 


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AUTHORS

Bloomberg BNA Portfolios are written by leading tax professionals who set the standard as leaders in their fields. The Travel and Transportation Expenses – Deductions and Recordkeeping Requirements portfolio was authored by the following attorney.  

 

IRA B. STECHEL

Ira B. Stechel obtained his J.D. from Cornell Law School and his LL.M. (Taxation) from New York University. He is a  member of the New York Bar, American Bar Association (Section of Taxation), New York State Bar Association (Tax Section), Committee on Corporations, and Committee on Partners and Partnerships. He is the author, 520 T.M., Entertainment, Meals, Gifts and Lodging — Deduction and Recordkeeping Requirements, a contributor to the Journal of Taxation, Taxation for Lawyers, Taxation for Accountants, Tax Management Real Estate Journal, and a lecturer at N.Y.U. Institute on Federal Taxation and Fordham Law School.

   

Credentials /

Ira B. Stechel, B.A.: magna cum laude, City College of New York (1969); J.D., Cornell Law School (1972); Note Editor, Cornell International Law Journal (1971-72); LL.M. (Taxation), New York University; member, New York Bar, American Bar Association (Section of Taxation); New York State Bar Association (Tax Section), Committee on Corporations, Committee on Partners and Partnerships; author, 520 T.M., Entertainment, Meals, Gifts and Lodging — Deduction and Recordkeeping Requirements; contributor, Journal of Taxation, Taxation for Lawyers, Taxation for Accountants, Tax Management Real Estate Journal; lecturer, N.Y.U. Institute on Federal Taxation and Fordham Law School.


TABLE OF CONTENTS

Detailed Analysis

I. Introduction

II. Travel Expenses

A. General

1. Background

2. Summary of Requirements for Deduction

3. Effect of § 274 on Deductibility of Expenses

4. Who May Deduct Travel Expenses

B. “Overnight” Rule

C. “Away From Home” Requirement

1. Nature of “Tax Home” Problem

2. Single Place of Business

3. Multiple Places of Business

a. Major and Minor Business Locations

b. Minor Business at Residence

c. Married Couple Working Apart

4. Residence

5. Work of Uncertain Duration

a. Significance of Distinction Between “Temporary” and “Indefinite” Work

b. One-Year Bright-Line Test

c. Factors Indicative of “Temporary” Work

d. Factors Indicative of “Indefinite” Work

e. Temporary Work Which Becomes Indefinite

f. Seasonal Employment

g. Probationary Employment

h. Foreign Employment

(1) In General

(2) Foreign Earned Income Exclusion

i. Employment of Nonresident Aliens

j. Travel to Residence from Temporary Employment

k. Indirect Deduction of Moving Expenses

6. Occupations Involving Frequent Travel

a. Risk of No “Tax Home”

b. Traveling Salesmen

c. Transportation Workers

d. Construction Workers

e. Professional Athletes

f. Performing Artists

g. Lecturers and Academics

7. Government Travel

a. Military Personnel

(1) Active Duty

(2) Reservist

b. Federal Legislators and Officials

(1) Congressmen

(2) Diplomats, Officials and Other Federal Employees

c. State and Local Legislators and Officials

(1) General

(2) Election Under § 162(h)

D. “Pursuit of Trade or Business”

1. Requisite Business Purpose

a. Furtherance of Existing Business

b. New Business or Employment

2. Expenses for Production of Income

3. Categories of Deductible Travel Expenses

a. General Types of Deductible Costs

(1) Taxpayer's Own Costs

(2) Expenses of Spouse or Other Accompanying Individual

(3) Lavish or Extravagant Meals or Lodging

b. Domestic Travel

(1) Costs of Combined Business and Personal Travel Within the United States

(2) Conventions and Meetings Within the United States

c. Foreign Travel

(1) Costs of Combined Business and Personal Travel Abroad

(a) Foreign Travel Expense Allocation Rules

(b) Exceptions to Allocation Rules

(i) Travel for One Week or Less

(ii) Lack of Substantial Control Over Arranging Trip

(iii) Vacation Not a Major Consideration

(iv) Less than 25% of Time Spent in Non-Business Activity

(c) Allocating Foreign Travel Expenses

(2) Limitations Upon Foreign Conventions, Seminars and Meetings

(a) On Land

(b) At Sea

(3) Limitations Upon “Luxury Water Transportation”

4. Non-Business Travel

a. Travel for Charitable Purposes

b. Travel for Medical Purposes

c. Travel for Educational Reasons

III. Transportation and Commuting Expenses

A. Transportation Expenses

B. Commuting Costs

1. General

2. Travel While in “Work” Status

3. Residence as Principal Business Location and Telecommuting

4. Transporting Tools or Equipment

5. Commuting to Temporary Job

6. Applicability of Fringe Benefit Rules

IV. Deductions and Credits for Business and Income-Producing Use of Passenger Automobiles and Other Listed Property

A. Usage for Business or Income-Producing Activities

1. General

2. Apportionment Between Business and Personal Use

B. Deductions and Credits for Business or Income-Producing Usage

1. Mileage Costs

2. Actual Costs of Operation

3. Depreciation

a. Post-1986 Property

(1) General Rule

(2) Bonus Depreciation

(3) Trucks and Vans

(4) Electric Vehicles

b. 1981–1986 Property

c. Pre-1981 Property

4. Section 179 Allowance

5. Leasing Costs

6. Deduction for Clean Fuel Vehicles and Refueling Property

7. Tax Credits for Certain Alternative or Electric Vehicles or Refueling Property

a. Qualified Plug-In Electric Drive Low-Speed Vehicles, Motorcycles, and Three-Wheeled Vehicles Acquired After February 17, 2009

b. Qualified Electric Vehicles Placed in Service after June 30, 1993, and Before 2007

c. Alternative Motor Vehicle Credit

d. Alternative Fuel Vehicle Refueling Property Credit

e. Qualified Plug-In Electric Drive Motor Vehicle Credit

8. Investment Tax Credit (Repealed)

9. Qualified Motor Vehicle Taxes

C. Curtailed Benefits for “Luxury” Automobiles and Other “Listed Property”

1. Overview and Meaning of “Listed Property”

2. Definitions of Other Limiting Terms

a. Passenger Automobiles

b. Qualified Business Use

c. Business/Investment Use

d. Business Use Percentage

e. Property Predominantly Used in Qualified Business Use

f. Straight-Line Method Over Earnings and Profits Life

g. Excess Depreciation

3. Depreciation Limitations for Passenger Automobiles

4. Effect of § 179 Election

5. Capital Improvements and Cellular Telephones

6. Recapture Upon Decline in Business Use

7. Like-kind Exchange

8. Limitations on Leased Passenger Automobiles

a. Lessors

b. Lessees

9. Deductions for Use of Listed Property

a. Employee Deduction

b. Employer Deduction

10. Limitation on Former Investment Tax Credit

D. Luxury Excise Tax on Certain Automobiles

V. Personal Use of an Employer's Automobile and Other Includible and Excludible Fringe Benefits

A. General

1. Historical Overview

2. Summary of Current Law

B. Exclusions from Income

1. Exempt Vehicles

2. Exempt Benefits

a. Working Condition Fringe

(1) Definition

(2) Examples

(a) Commuting

(i) General

(ii) Safety-Related Commuting Valuation Rule

(iii) Bona Fide Noncompensatory Vehicle Availability Valuation Rule

(b) Parking Privileges

(c) Demonstration Automobile Use

(d) Car and Driver for Security Purposes

(e) Product Testing Use

(f) Availability of Farm Vehicle for Personal Use

b. No-Additional-Cost Service Fringe

c. Qualified Employee Discount Fringe

d. De Minimis Fringe

e. Qualified Transportation Fringe

(1) Overview

(2) Excludible Benefits

(a) Commuting Subsidies

(b) Parking Allowance

(3) Form of Benefits

(a) Reimbursement Arrangement

(b) Compensation Reduction Arrangements

(4) Permissible Recipients

C. Valuation of Includible Fringe Benefits

1. General Valuation Rule

2. Employer-Provided Automobiles

a. Overview of Valuation Guidelines

b. Special Valuation Rules

(1) Election of Use of Special Rules

(2) Lease Valuation Rule

(a) Valuation by Individual Automobile

(b) Fleet Valuation

(3) Cents-Per-Mile Method

(4) Commuting Valuation Rule

3. Aircraft Flights

a. Election of Use of Special Rules

b. Employer-Provided Aircraft

c. Commercial Flights

d. Frequent Flyer and Other Travel Awards

D. Employment Taxes on Fringe Benefits

1. 1984 Act Provisions

2. Withholding Elections

a. Election of Payment Period

b. Special Accounting Rule

c. Election Not to Withhold on Value of Personal Use of Certain Vehicles

VI. Substantiation, Reporting and Recordkeeping Requirements Relating to Travel and Transportation Expenses

A. Overview of § § 274 and 280F Limitations

B. Specific Elements of an Expenditure to be Substantiated

1. Travel

2. Transportation

3. Listed Property

4. Entertainment, Meals, Gifts, and Entertainment Facilities

a. Entertainment, Meals and Gifts

b. Entertainment Facilities

c. Automobiles or Airplanes as Entertainment Facilities

d. Overlapping Transportation and Entertainment Expenditures

e. 50% Cutback for Deduction of Costs of Business Entertainment and Meals

(1) Amounts Subject to Cutback

(2) Meals in Travel Status

(3) Exceptions to 50% Cutback

(4) Reimbursement and Per Diem Arrangements

(5) Interplay with Other Limitations

(6) Effective Dates

5. Aggregation of Separate Expenditures and Business Use

6. Burden of Proof

C. Acceptable Methods of Substantiation

1. Background of Present Recordkeeping Requirements

2. Substantiation by Adequate Records

a. Diaries and Account Books

b. Documentary Evidence

c. Other Sufficient Evidence

d. Employee Statement of Use of Listed Property

e. Additional Information

f. Federal Employees

3. Permissible Simplified Recordkeeping

a. Standard Mileage Rate and Mileage Allowances

(1) Standard Mileage Rates

(2) Mileage Allowances

(a) General

(b) Fixed and Variable Rate Payment

(i) Overview

(ii) Fixed Cost and Variable Cost Components

(iii) Substantiation and Recordkeeping Requirements

(c) Charitable Travel, Medical Travel, and Moving Costs

(d) Rural Mail Carriers

b. Lodging, Meal, and Incidental Travel Expenses

(1) Overview

(2) Per Diem Substantiation Method

(3) High-Low Substantiation Method

(4) Advantages to Use of Per Diem Allowances

c. Employer-Written Policy Statements

d. Sampling Technique

(1) Listed Property

(2) Meals and Entertainment

4. Exceptions to the Substantiation Requirements

a. Exempt Vehicles

(1) Vehicles Subject to Employer-Written Policy Statements

(2) Qualified Nonpersonal Use Vehicles

(3) Farming Use Vehicles

(4) Vehicles Deemed Used Entirely for Personal Purposes

(5) Consistency Requirements

b. Exempt Expenditures

c. Relief Provisions

(1) Substantial Compliance

(2) Exceptional Circumstances

(3) Loss of Records

5. Retention of Records

6. Information Required on Return

7. Taxpayer and Preparer Penalties

D. Reporting and Recordkeeping Requirements

1. Reporting of Reimbursements and Advances

a. Statutory Pattern

b. Accountable Reimbursement Arrangements

(1) Business Connection

(2) Substantiation

(3) Returning Excess Amounts

c. Nonaccountable Reimbursement Arrangements

d. Employer Reporting Requirements

e. Employee Reporting Requirements

(1) Post-1988 Reimbursement Arrangements

(a) General Rules for Accountable Plans

(b) Specific Situations Involving Accountable Plans

(i) Expenses Equal to Reimbursements

(ii) Expenses Less Than Reimbursements

(iii) Expenses Exceed Reimbursements

(c) General Rules for Nonaccountable Plans

(2) Pre-1989 Reimbursement Arrangements

(a) When No Reporting Was Required

(i) Adequate Accounting

(ii) Expenses Not More Than Reimbursements

(b) When Reporting Is Required

(i) Reimbursements in Excess of Expenses

(ii) Expenses in Excess of Reimbursements

(iii) Absence of an Adequate Accounting

f. Withholding Requirements

2. Bearing the Burden of the Recordkeeping Requirements

a. When Upon Employer

b. When Upon Employee

c. When Upon Independent Contractor

3. Treating Employee Business Expenses

a. Deductibility of Employee Business Expenses

(1) Distinguishing Employee from Employer Expenses

(2) Reimbursed or Reimbursable Expenses

(3) Nonreimbursable Expenses

b. Determination of Adjusted Gross Income

c. 2% Floor for Unreimbursed Employee Business Expenses

(1) Summary of Limitations

(2) Categorization of Miscellaneous Itemized Deductions

(3) Application of 2% Floor to Pass-Through Entities and Estates and Trusts

(4) Limited Exceptions to Applicability of 2% Floor

d. 3% of AGI Reduction in Itemized Deductions

4. Effect of Expense Disallowance

a. Disallowance Under § 162

(1) Effect on Employer

(2) Effect on Employee

b. Disallowance Under § 274

(1) Policy of Single Disallowance

(2) Possibility of Double Disallowance


WORKING PAPERS

Working Papers

Table of Worksheets

Relevant Worksheets Appearing in Other Portfolios:

Worksheet 1 Annual Revenue Procedure on § 280F Inclusion Amounts, Additional Inclusion Amounts, and Depreciation Limits for Automobile Owners

Worksheet 2 Section 61 Annual Lease Values [Regs. § 1.61-21(d)(2)(iii), as added by T.D. 8256, 54 Fed. Reg. 28756 (7/6/89)]

Worksheet 3 Passenger Automobiles (other than Electric Automobiles) - Inflation-Adjusted Dollar Limits on Depreciation

Worksheet 4 Electric Automobiles - Inflation-Adjusted Dollar Limits on Depreciation

Worksheet 5 Standard Mileage Rates

Worksheet 6 Per Diem Rates – High-Low Method

Worksheet 7 Valuation of Non-Commercial Flights on Employer-Provided Aircraft

Worksheet 7A FAVR Allowances

Worksheet 8 Elements to be Proved of Expenses for Travel, Transportation, Meals, Entertainment and Business Gifts Under § 274

Worksheet 9 Reporting Employee Business Expenses and Reimbursements Under § § 62 and 274

Worksheet 10 Sample Employee Statement to Employer Regarding Employee's Use of Employer's Automobile Under § 162

Worksheet 11 Sample Notification to Employees of Employer's Use of Special Valuation Rule for Employer-Provided Automobile Under § 61

Worksheet 12 Sample Notification to Employee of Employer Election Under § 3402 Not to Withhold on Value of Employee's Personal Use of Vehicle

Worksheet 13 Comprehensive Expense Account Form

Worksheet 14 Sample Documentation Evidencing Employer Policy Requiring Unreimbursed Business Expenses

Worksheet 15 [Reserved]

Worksheet 16 Excerpts from Conference Report (H.R. Rep. No. 67, 99th Cong., 1st Sess. 4 (1985)) to Accompany P.L. 99-44, Contemporaneous Recordkeeping Requirements Repeal (§ 274)

Worksheet 17 Excerpts from Conference Report (H.R. Rep. No. 998, 100th Cong., 2d Sess. (1988)) to Accompany P.L. 100-485, Family Support Act of 1988

Worksheet 18 Announcement 85-113, 1985-31 I.R.B. 31

Bibliography

OFFICIAL

Federal Statutes:

Primary:

Secondary:

Treasury Regulations:

Legislative History:

Primary:

Secondary:

Treasury Rulings:

Tax Management Portfolios

Cases:

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