Travel, Meals, and Entertainment To be deductible, expenses incurred for travel, meals, andentertainment must be ordinary and necessary expenses of carrying onyour trade or business. Generally, you also must show thatentertainment expenses (including meals) are directly related to, orassociated with, the conduct of your trade or business. The following discussion explains how you deduct any reimbursementsor allowances you make for these expenses incurred by your employees.If you are self-employed and incur these expenses yourself, seePublication 463for information on how you can deduct them. Reimbursements How you deduct a reimbursement or allowance arrangement (includingper diem allowances, discussed later) for travel, meals, andentertainment expenses incurred by your employees depends on whetheryou have an accountable plan or a nonaccountable plan. Areimbursement or allowance arrangement is a system by whichyou pay advances, reimbursements, and charges for your employees'business expenses and they substantiate their expenses to you so youcan substantiate your deduction of the advance, reimbursement, orcharge. If you make a single payment to your employees and it includesboth wages and an expense reimbursement, you must specify the amountof the reimbursement. If you reimburse these expenses under an accountable plan, deductthem as travel, meal, and entertainment expenses. If you reimbursethese expenses under a nonaccountable plan, you must report thereimbursements as wages on Form W-2 and deduct them as wages.See Table 16-1, Reporting Reimbursements. Accountable Plans To be an accountable plan, your reimbursement or allowancearrangement must require your employees to meet all of the followingrules. They must have paid or incurred deductible expenses whileperforming services as your employees. They must adequately account to you for these expenseswithin a reasonable period of time. They must return any excess reimbursement or allowancewithin a reasonable period of time. An arrangement under which you advance money to employees istreated as meeting (3) above only if the following requirements arealso met. The advance is reasonably calculated not to exceed theamount of anticipated expenses. You make the advance within a reasonable period oftime. TaxTip: Reasonable period of time. A reasonable period of timedepends on the facts and circumstances. Generally, you can considerthe period reasonable if your employees adequately account for theexpenses within 60 days after they pay or incur them and if theyreturn any excess reimbursement within 120 days after they pay orincur the expense. Also, the period is considered reasonable if yougive your employees a periodic statement (at least quarterly) thatasks them to either return or adequately account for outstandingamounts and they do so within 120 days of the statement. An advancemade to an employee within 30 days of the time he or she has anexpense is considered made within a reasonable period. If any expenses reimbursed under this arrangement are notsubstantiated, or are an excess reimbursement that is not returnedwithin a reasonable period of time by an employee, you cannot treatthese expenses as reimbursed under an accountable plan. Instead, treatthe reimbursed expenses as paid under a nonaccountable plan, discussedlater. How to deduct.You can take a deduction for travel, meals, and entertainment ifyou reimburse your employees for these expenses under an accountableplan. The amount you deduct for meals and entertainment, however, maybe subject to a 50% limit, discussed later. If you are a soleproprietor, deduct the reimbursement on line 24 of Schedule C (Form1040). If you file a corporation income tax return, include thereimbursement in the amount claimed on the "Other deductions"line of Form 1120 or Form 1120-A. If you file any other incometax return, such as a partnership or S corporation return, deduct thereimbursement on the appropriate line of the return, as provided inthe instructions for that return. Reporting reimbursements Per Diem and Car Allowances You may reimburse your employees under an accountable plan based ontravel days, miles, or some other fixed allowance. In these cases,your employee is considered to have accounted to you for the amount ofthe expense that does not exceed the rates established by the federalgovernment. Your employee must actually substantiate to you the otherelements of the expense, such as time, place, and business purpose. Car allowance.Your employee is considered to have accounted to you for carexpenses that do not exceed the standard mileage rate. For1999, the standard mileage rate is 32.5 cents for all business milesincurred for the period January 1 to March 31. For the period April 1to December 31, 1999, the standard rate is 31 cents per mile for eachbusiness mile. The standard mileage rate is considered to be thefederal rate. If the car allowance you pay is equal to or less thanthe standard mileage rate, see Allowance LESS than or EQUAL tothe federal rate, later. If the car allowance you pay is morethan the standard mileage rate, see Allowance MORE than thefederal rate, later. You can choose to reimburse your employees using a fixed andvariable rate (FAVR) allowance. This is an allowance that includes acombination of payments covering fixed and variable costs, such as acents-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 informationon using a FAVR allowance, see Revenue Procedure 98-63 inInternal Revenue Bulletin No. 1998-52. You can read RevenueProcedure 98-63 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 diemallowance, how you report and deduct the allowance depends on whetherthe allowance is for lodging and meal expenses or for meal expensesonly and whether the allowance is more than the federal rate. Thefederal rate can be figured using any one of the followingmethods. The regular federal per diem rate. The standard meal allowance. The high-low method. Regular federal per diem rate.The regular federal per diem rate is the highest amount that thefederal government will pay to its employees for lodging, meal, andincidental expenses (or meal and incidental expenses only) while theyare traveling away from home in a particular area. The rates aredifferent for different locations. Publication 1542lists the rates inthe continental U.S. The federal rates for meal and incidental expenses are the same asthose rates discussed under Standard Meal Allowance inchapter 1 in Publication 463. Standard meal allowance.For an allowance for meal expenses only, the federal rateis the standard meal allowance (see chapter 1 in Publication 463).Youmay pay an allowance for meal expenses only if, for example, youreimburse actual lodging expenses or do not reimburse lodging expensesbecause there are none. High-low method.This is a simplified method of computing the federal per diem ratefor lodging and meal expenses for traveling within the continentalUnited States. It eliminates the need to keep a current list of theper diem rate in effect for each city in the continental UnitedStates. Under the high-low method, the per diem amount for travel during1999 is $185 for certain locations. All other areas have a per diemamount of $115. The areas eligible for the $185 per diem amount underthe high-low method are listed in Publication 1542. Reporting per diem and car allowances.The following paragraphs explain how to report per diem and carallowances. The manner in which you report them depends on how theamount of 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 theappropriate federal rate, that allowance is not part of the employee'spay. Deduct the allowance as travel expenses (including meals that maybe subject to the 50% limit, discussed later). See How to deductunder Accountable Plans, discussed earlier. Allowance MORE than the federal rate.If your employee's allowance is more than the appropriate federalrate, you must report the allowance as two separate items. You include the allowance amount up to the federal rate in box 13(code L) of the employee's Form W-2. Deduct it as travelexpenses (as explained above). This part of the allowance is treatedas reimbursed under an accountable plan. You include the allowance amount that is more than the federal ratein box 1 (and in boxes 3 and 5 if they apply) of the employee's FormW-2. Deduct it as wages subject to income tax withholding,social security, Medicare, and federal unemployment taxes. This partof the allowance is treated as reimbursed under a nonaccountable planas explained later under Nonaccountable Plans. Meals and Entertainment Under an accountable plan, you can generally deduct only 50% of anyotherwise deductible business-related meal and entertainment expensesthat you reimburse your employees. The deduction limit applies even ifyou reimburse them for 100% of the expenses. Application of the 50% limit.The 50% deduction limit applies to reimbursements you make to youremployees for expenses they incur while traveling away from home onbusiness and for entertaining business customers at your place ofbusiness, a restaurant, or other location. It applies to attending abusiness convention or reception, business meeting, or businessluncheon at a club. The deduction limit may also apply to meals youfurnish on your premises to your employees (discussed in chapter 3). Related expenses.Taxes and tips relating to a meal or entertainment activity thatyou reimburse to your employee under an accountable plan are includedin the amount that is subject to the 50% limit. Reimbursements youmake 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 amountyou pay for parking at a sports arena, are all subject to the 50%limit. However, the cost of transportation to and from a business mealor entertainment activity that is otherwise allowable is not subjectto the 50% limit. How to apply the 50% limit.If you provide your employees with a per diem allowance (discussedearlier) only for meal and incidental expenses, the amount treated asan expense for food and beverages is the lesser of the following. The per diem allowance. The federal meal and incidental expense rate (M &IE). If you provide your employee with a per diem allowance that coverslodging, meals, and incidental expenses, you must treat an amountequal to the federal M & IE rate for the area of travel as anexpense for food and beverages. If you use the high-low method, thefederal M & IE rate is treated as $42 for a high-cost locality and$34 for any other locality. If the per diem allowance you provide fora full day of travel is less than the federal per diem rate for thearea of travel, you can treat 40% of the per diem allowance as theamount for food and beverages. Drilling rigs.The 50% limit does not apply to the food or beverages an employerprovides on an oil or gas platform or drilling rig located offshore orin Alaska. This exception also applies to food and beverages providedby an employer at a support camp that is near and integral to an oilor gas drilling rig located in Alaska. Meal expenses when subject to "hours of service" limits.You can deduct 55% of the reimbursed meals your employees consumewhile away from their tax home on business during or incident to anyperiod subject to the Department of Transportation's hours of servicelimits. The percentage increases to 60% for 2000. Individuals subject to the Department of Transportation's hours ofservice limits include the following. Certain air transportation workers (such as pilots, crew,dispatchers, mechanics, and control tower operators) who are underFederal Aviation Administration regulations. Interstate truck operators and bus drivers who are underDepartment of Transportation regulations. Certain railroad employees (such as engineers, conductors,train crews, dispatchers, and control operations personnel) who areunder Federal Railroad Administration regulations. Certain merchant mariners who are under Coast Guardregulations. De minimis (minimal) fringe benefit.The 50% limit does not apply to an expense for food or beveragethat is excluded from the gross income of an employee because it is ade minimis fringe benefit. See chapter 4for additional information onde minimis fringe benefits. Company cafeteria or executive dining room.You can deduct the cost of food and beverages you provide primarilyto your employees on your business premises. This includes the cost ofmaintaining the facilities for providing the food and beverages. Theseexpenses are subject to the 50% limit unless they qualify as deminimis fringe benefits, discussed in chapter 4,or unless they arecompensation to your employees and you treat them as provided under anonaccountable plan, as discussed later. Employee activities.You can deduct the expense of providing recreational, social, orsimilar activities (including the use of a facility) for youremployees. The benefit must be primarily for your employees who arenot highly compensated employees. The definition of a highlycompensated employee is the same as the one given in chapter 4underExclusion of Certain Fringe Benefits, with the followingexceptions. An employee owning less than a 10% interest in your businessis not considered a shareholder or other owner. An employee is treated as owning any interest owned by afamily member. Family members include brothers, sisters, a spouse,ancestors, and lineal descendants. These expenses are not subject to the 50% limit. For example, theexpenses for food, beverages, and entertainment for a company-widepicnic are not subject to the 50% limit. Nonaccountable Plans A nonaccountable plan is an arrangement that does not meet therequirements for an accountable plan. All amounts paid, or treated aspaid, under a nonaccountable plan are reported as wages on FormW-2. The payments are subject to income tax withholding, socialsecurity, Medicare, and federal unemployment taxes. You can deduct thereimbursement as compensation or wages only to the extent it meets thedeductibility tests for employees' pay in chapter 2.Deduct theallowable amount as compensation or wages on the appropriate line ofyour income tax return, as provided in its instructions. Other Reimbursed Expenses You may provide meals and entertainment expenses to individuals whoare not your employees. These expenses may or may not be subject tothe 50% limit, depending on the circumstances. Nonemployee.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 isconsidered entertainment, you can deduct the expense only to theextent it is included in the gross income of the recipient ascompensation for services or as a prize or award. If you are requiredto include these expenses on an information return (Form1099-MISC), you cannot claim a deduction for them unless youfile the necessary information return. For more information about whento file Form 1099-MISC, see the separate Instructions forForms 1099, 1098, 5498, and W-2G. These expenses are notsubject to the 50% limit. Director, stockholder, or employee meetings.You can deduct entertainment expenses directly related to businessmeetings of your employees, partners, stockholders, agents, ordirectors. You can provide some minor social activities, but the mainpurpose of the meeting must be your company's business. These expensesare subject to the 50% limit. Trade association meetings.You can deduct expenses directly related to and necessary forattending business meetings or conventions of certain exemptorganizations. These organizations include business leagues, chambersof commerce, real estate boards, and trade and professionalassociations. These expenses are subject to the 50% limit. Sale of meals or entertainment.You can deduct the cost of providing meals, entertainment, goodsand services, or use of facilities that you sell to the public. Forexample, if you run a nightclub, your expense for the entertainmentyou furnish to your customers, such as a floor show, is a businessexpense. These expenses are not subject to the 50% limit. Advertising to promote goodwill.You can deduct the cost of providing meals, entertainment, orrecreational facilities to the general public as a means ofadvertising or promoting goodwill in the community. For example, theexpense of sponsoring a television or radio show is deductible. Youcan also deduct the expense of distributing free food and beverages tothe 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 packagedeal that includes a ticket to a charitable sports event if the eventmeets certain conditions. See Entertainment tickets inchapter 2 of Publication 463for a list of the conditions a charitablesports event must meet.