SECTION 2. BACKGROUND AND

CHANGES

.01 Section 162(a) allows a deduction for ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including expenses for travel away from home. However, under section 262, a taxpayer may not deduct personal travel or living expenses.

.02 Section 274(n) generally limits the amount allowable as a deduction under section 162 for any expense for food, beverages, or entertainment to 50 percent of the otherwise allowable amount. For an individual during, or incident to, a period of duty subject to the hours of service limitations of the Department of Transportation, section 274(n)(3) provides that, for taxable years beginning in 2008 or thereafter, the deductible percentage for these expenses is 80 percent. .03 To deduct expenses for travel away from home, a taxpayer must substantiate the expenses under section 274(d), which also authorizes the Secretary to prescribe that some or all of the substantiation requirements do not apply to an expense that does not exceed a particular amount.

.04 Section 1.274–5(g) authorizes the Commissioner to prescribe rules under which reimbursement arrangements or per diem allowances are regarded (1) as equivalent to substantiation, by adequate records or other sufficient evidence, of the amount of travel expenses for purposes of section 1.274–5(c), and (2) as satisfying the requirements of an adequate accounting to the employer of the amount of travel expenses for purposes of section 1.274–5(f). .05 For purposes of determining adjusted gross income, section 62(a)(2)(A) allows an employee to deduct business expenses the employee pays or incurs in performing services under a reimbursement or other expense allowance arrangement with a payor.

.06 Section 62(c) provides that an arrangement is not treated as a reimbursement or other expense allowance arrangement for purposes of section 62(a)(2)(A) if it (1) does not require the employee to substantiate the expenses covered by the arrangement to the payor, or (2) allows the employee to retain any amount in excess of the substantiated expenses covered un

der the arrangement. Section 62(c) further provides, however, that substantiation is not required for the expense to the extent provided in regulations under section 274(d). .07 Under section 1.62–2(c), a reimbursement or other expense allowance arrangement satisfies the requirements of section 62(c) if it meets the requirements of business connection, substantiation, and returning amounts in excess of expenses. In that case, all amounts paid under the arrangement are treated as paid under an accountable plan and are excluded from income and wages. If an arrangement does not meet one or more of these requirements, all amounts paid under the arrangement are treated as paid under a nonaccountable plan and are included in an employee’s gross income, must be reported as wages or compensation on the employee’s Form W–2, and are subject to the withholding and payment of employment taxes.

.08 Section 1.62–2(e)(2) provides that the amount of a business expense substantiated under section 1.274–5(g) is treated as substantiated for purposes of section 1.62–2. .09 Under section 1.62–2(f)(2), the Commissioner may prescribe rules for treating an arrangement providing per diem allowances as satisfying the requirement of returning amounts in excess of expenses if the arrangement requires the employee to return amounts that relate to unsubstantiated travel days, even though the arrangement does not require the employee to return the portion of the allowance that relates to substantiated travel days but that exceeds the deemed substantiated amount for those days. The allowance must be reasonably calculated not to exceed the amount of the employee’s expenses or anticipated expenses and the employee must be required to return within a reasonable period of time any portion of the allowance that relates to unsubstantiated travel days. Under section 1.62–2(h)(2)(i)(B), the portion of the allowance that relates to substantiated travel days but exceeds the substantiated amount for those days and that the employee is not required to return is subject to withholding and payment of employment taxes. See sections 31.3121(a)–3, 31.3231(e)–1(a)(5), 31.3306(b)–2, and

2011–42 I.R.B. 521 October 17, 2011

revenue procedure to substantiate their expenses. The rules of sections 3, 4, 5, and 6 (except section 6.06) of this revenue procedure apply to reimbursements from payors to partners or volunteers.