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Chapter 28. Car Expenses and Other Employee Business Expenses

Important Changes for 1992

Standard mileage rate. The standard mileage rate for 1992 is 28 cents per
mile for all business miles.

Limit on itemized deductions. If your adjusted gross income is more than
$105,250 ($52,625 if you are married filing separately), the amount of your
itemized deductions may be limited. See Chapter 21 and the instructions for
Form 1040.

Introduction

This chapter discusses rules for deducting certain business-related expenses
connected with:

∙  Traveling away from home,

∙  Entertainment,

∙  Business gifts,

∙  Local business transportation, and

∙  Business use of a car.

This chapter also discusses:

∙  What records you must make or keep to prove your expenses,

∙  How to handle reimbursements of your employee business expenses, and

∙  How to report your expenses on Form 2106.

Expenses fully reimbursed. You will not need to read this chapter if all of
the following are true:

1)  You fully accounted to your employer for your work-related expenses,

2)  You were fully reimbursed, and

3)  Box 17 of your Form W─2 shows no amount with a code L.

There is no need to show the expenses or the reimbursement on your return.
See Reimbursements later in this chapter if you would like more information
on reimbursements and accounting to your employer.

Related publications and forms.

This chapter refers to several publications and forms that you may need. The
list of forms does not include Forms 1040, 1040A, and 1040EZ. For more
information, you may want to order any of the following:

    Publication 463, Travel, Entertainment, and Gift Expenses

    Publication 334, Tax Guide for Small Business

    Publication 535, Business Expenses

    Publication 587, Business Use of Your Home

    Publication 907, Tax Information for Persons with Handicaps or
    Disabilities

    Publication 917, Business Use of a Car

    Schedule A (Form 1040), Itemized Deductions

    Schedule C (Form 1040), Profit or Loss From Business

    Form 2106, Employee Business Expenses

    Form 4562, Depreciation and Amortization

Travel Expenses

Use this section to determine if you have deductible travel expenses.
This section starts with the definition of "tax home" - in order to have
deductible travel expenses, you must be traveling away from your tax home. It
continues with a discussion of different types of travel expenses. The section
then discusses the rules for travel inside and outside the United States and
deductible expenses of attending a convention.

Travel expenses defined. For tax purposes, travel expenses are ordinary
and necessary expenses that you pay while traveling away from home for your
business, profession, or job. An ordinary expense is one that is common and
accepted in your field of business, trade, or profession. A necessary expense
is one that is helpful and appropriate to your business. An expense does not
have to be indispensable to be considered necessary. However, you cannot
deduct expenses to the extent they are lavish or extravagant.

Examples of deductible travel expenses are given later in this section.

Traveling away from home. You are traveling away from home if:

1)  Your duties require you to be away from the general area of your tax home
    (defined next) substantially longer than an ordinary day's work, and

2)  You need to get sleep or rest to meet the demands of your work while away
    from home.

This rest requirement does not mean napping in your car. You do not have to be
away from your tax home for a whole day or from dusk to dawn as long as your
relief from duty is long enough to get necessary sleep or rest.

Example 1. You are a railroad conductor. You leave your home terminal on a
regularly scheduled round-trip run between two cities and return home 16 hours
later. During the run, you have 6 hours off at your turnaround point where you
eat two meals and rent a hotel room to get necessary sleep before starting the
return trip. You are considered to be away from home, and you can deduct
travel expenses.

Example 2. You are a truck driver. You leave your terminal and return to
it later the same day. You get an hour off at your turnaround point to eat.
Because you are not off to get necessary sleep and the brief time off is not
an adequate rest period, your trip is not considered as travel away from home,
and you cannot deduct travel expenses.

Tax Home

To deduct travel expenses, you must first determine the location of your tax
home.

Generally, your tax home is your regular place of business or post of duty,
regardless of where you maintain your family home. It includes the entire
city or general area in which your business or work is located. If you have
more than one regular place of business, your tax home is your main place of
business. If you do not have a regular or a main place of business because of
the nature of your work, then your tax home is the place where you regularly
live.

If you do not fit any of these categories, you are considered a transient (an
itinerant) and your tax home is wherever you work. As a transient, you cannot
claim a travel expense deduction because you are never considered away from
home.

Main place of business or work. You should use the following factors to
determine your main place of business or work:

1)  The total time you ordinarily spend working in each area,

2)  The degree of your business activity in each area, and

3)  The relative amount of your income from each area.

Example. You live in Cincinnati where you have a seasonal job for 8 months and
earn $15,000. You work the remaining 4 months in Miami, also at a seasonal
job, and earn $4,000. Cincinnati is your main place of work because you spend
most of your time there and earn most of your income there.

No main place of business or work. You may have a tax home even if you do not
have a regular or main place of work. Your tax home may be the home where you
regularly live. If you do not have a regular or main place of business or
work, use the following three factors to see if you have a tax home:

1)  You have part of your business in the area of your main home and use that
    home for lodging while doing business there.

2)  You have living expenses at your main home that you duplicate because
    your business requires you to be away from that home.

3)  You have not left the area in which both your traditional place of
    lodging and your main home are located; you have a member or members
    of your family living at your main home; or you often use that home
    for lodging.

If you meet all three factors above, your tax home is the home where you
regularly live, and you may be able to deduct travel expenses. If you meet
only two of the factors, you may have a tax home depending on all the facts
and circumstances. If you meet only one factor, you are a transient; you do
not have a tax home and you cannot deduct travel expenses.

Example. You are an outside salesperson with a sales territory covering
several states. Your employer's main office is in Denver, and you return there
for one month each year for business and nonbusiness reasons. Your business
work assignments are temporary, and you have no way of knowing where future
assignments will be located.

You have lived in Denver for 14 years, first with your spouse in your own
house until your divorce, and then with your married sister in her house. You
pay your sister $50 a month for a room in her house where you stay when in
Denver and where you also keep your furniture and any clothing that you do
not take on your out-of-town business trips.

You have met all three factors listed earlier, including the traditional
lodging aspects of factor (3). Therefore, you have a tax home in Denver for
travel expense deduction purposes.

Transient workers. If you move from job to job, maintain no fixed home, and
are associated with no particular business locality, each place you work
becomes your main place of business and your tax home. You cannot deduct your
expenses for meals and lodging.

Living away from your tax home. If you (and your family) live in an area
outside of your tax home (main place of work), you cannot deduct travel
expenses between your tax home and your family home. You also cannot deduct
the cost of meals and lodging while at your tax home. See Example 1, below.

If you are working temporarily in the same city where you and your family
live, you may be considered as traveling away from home. See Example 2, below.

Example 1. You live with your family in Chicago, but work in Milwaukee, where
you stay in a hotel and eat in restaurants during the week. You return to
Chicago every weekend. You cannot deduct any of your expenses for travel,
meals, and lodging in Milwaukee, because Milwaukee is your tax home and the
travel on weekends is not for a business reason.

Example 2. Your family home is in Pittsburgh, where you work 12 weeks a year.
The rest of the year you work for the same employer in Baltimore. In Baltimore,
you eat in restaurants and sleep in a rooming house. Your salary is the same
whether you are in Pittsburgh or Baltimore.

Because you spend most of your working time and earn most of your salary in
Baltimore, that city is your tax home. You cannot deduct any expenses you have
for meals and lodging there. However, when you return to work in Pittsburgh,
you are away from your tax home even though you stay at your family home.
Therefore, you can deduct the cost of your round trip between Baltimore and
Pittsburgh, and you can deduct your part of your family's living expenses
for meals and lodging while you are living and working in Pittsburgh.

Temporary Assignment or Job

Although you regularly work or carry on your business activities within
the city or general area of your tax home, you may have to work or conduct
business at another location. It may not be practical to return home from
this other location at the end of each day's work.

If your assignment or job away from your main place of work is temporary, that
is, if its end can be foreseen within a fixed and reasonably short time, your
tax home does not change. You are considered to be away from home for the
whole period, and your travel expenses are deductible.

However, your assignment or job is considered indefinite if its end cannot be
foreseen within a fixed and reasonably short time. If an assignment or job
is indefinite, you are not considered to be away from home, and your travel
expenses are not deductible.

If you expect employment to last for less than one year, whether your new
work assignment is temporary or indefinite depends on all the facts and
circumstances.

An assignment or job expected to last for a year or more is considered
indefinite and presumed not to be temporary. This is referred to as a one-year
presumption. Under certain circumstance, you may overcome this one-year
presumption. See Temporary Assignment or Job in Chapter 1 of Publication 463
for more information.

You can deduct the necessary travel expenses of first getting to your
temporary assignment or job and then returning to your tax home after the
assignment or job ends. Also, you can deduct your reasonable expenses for
meals (subject to the limit) and lodging, even for days off, while you are
at the temporary location.

Going home on days off. If you go home on your days off, you are not considered
away from home while you are in your hometown. You cannot deduct the cost of
your meals and lodging there. However, you can deduct your travel expenses,
including meals and lodging, while traveling from the area of your temporary
place of work to your hometown and back to work. You can claim these expenses
up to the amount it would have cost you for meals and lodging had you stayed
at your temporary place of work.

If you keep your hotel room during your visit home, you can deduct the cost of
your hotel room. In addition, you can deduct your expenses of returning home
up to the amount you would have spent for meals had you stayed at your
temporary place of work.

Indefinite Assignment

If your job at the new location is for an indefinite time, that is, if its
end cannot be foreseen within a fixed and reasonably short time, that location
becomes your new tax home. You cannot deduct your travel, meal, and lodging
expenses while there. You must include any amounts you receive from your
employer for living expenses in your income, even if they are called travel
allowances and you account to your employer for them. You may be able to
deduct the cost of relocating to your new tax home as a moving expense. See
Chapter 27 for more information.

You must determine whether your assignment is temporary or indefinite when
you start work. A series of assignments to the same location, all for short
periods but which together cover a long period, may be considered an
indefinite assignment.

Probationary work period. If you take a job that requires you to move, with
the understanding that you will keep the job if your work is satisfactory
during a probationary period, the job is indefinite. You cannot deduct any
expenses for meals and lodging during the probationary period.

Members of the armed forces. If you are a member of the U.S. armed forces on a
permanent duty assignment overseas, you are not traveling away from home, and
you cannot deduct your expenses for meals and lodging. You also cannot deduct
these expenses even if you are required to maintain a home in the United
States for your family members who are not allowed to accompany you overseas.
If you are transferred from one permanent duty station to another, you may
have deductible moving expenses which are explained in Chapter 27.

A naval officer assigned to permanent duty aboard a ship that has regular
eating and living facilities has a tax home aboard ship for travel expense
purposes.

What Are Travel Expenses?

Once you have determined that you are traveling away from your tax home, you
can determine which travel expenses are deductible on your tax return.

Deductible travel expenses include those ordinary and necessary expenses you
incur while traveling away from home on business. The type of expense you can
deduct depends on the facts and your circumstances. Therefore, use the
discussion that follows as a general guideline. You may have other deductible
travel expenses that are not covered here, depending on the facts and your
circumstances.

Records. When you travel away from home on business, you should keep records
of all the expenses you incur and any advances you receive from your employer.
You can use a log, diary, notebook, or any other written record to keep
track of your expenses. The types of expenses you need to record, along
with supporting documentation, are described later in this chapter under
Recordkeeping.

Transportation fares. You can generally deduct travel by airplane, train, or
bus between your home and your business destination. Your cost is the amount
you paid for your ticket. If you were provided with a ticket or you are riding
free as result of a "frequent flyer" or other similar program, you have no
deduction.

If you travel by ship, the amount you can deduct may be limited. See Luxury
Water Travel and Cruise ships in Chapter 1 of Publication 463.

Taxi, commuter bus, and limousine fares. You can generally deduct the fares
you pay for taxis, airport limousines, buses, or other types of transportation
between the airport or station and your hotel. You can also deduct these
fares between your hotel and the work site of your customers or clients, your
business meeting place, or your temporary work site. You cannot deduct costs
of sightseeing, shopping, or similar nonbusiness expenses.

Baggage and shipping costs. You can deduct the cost of sending baggage and
sample or display material between your regular work site and your temporary
work site.

Car expenses. You can deduct the cost of operating and maintaining your car
when traveling away from home on business. See Local Transportation Expenses
later in this chapter for information on how to figure this deduction.

Leasing a car. You can deduct the cost of leasing a car for business purposes
while you are traveling away from home. However, if you lease a car for 30
days or more, you may have to include an amount called an "inclusion amount"
in your income. This "inclusion amount" is explained in Publication 917.

Operating expenses. For a car you own, you may have a choice of deducting
actual business-related expenses or claiming the standard mileage rate. The
1992 standard mileage rate is 28 cents a mile for all business miles. See
Local Transportation Expenses later in this chapter for information about
using actual expenses or the standard mileage rate.

For a car you lease, you can deduct actual operating expenses, such as oil,
gas, and repairs. You cannot claim the standard mileage rate.

Lodging. You can deduct the cost of lodging if your business trip is overnight
or long enough to require you to stop for sleep or rest to properly perform
your duties.

Meals. You can deduct the cost of meals only if your business trip is
overnight or long enough to require you to stop for sleep or rest to properly
perform your duties. You cannot deduct the cost of meals if it is not necessary
for you to rest. If you pay for a business meal when you are not traveling,
you can deduct the cost only if you meet the rules for business entertainment.
These rules are explained later under Entertainment Expenses.

The expense of a meal includes amounts you spend for your food, beverages,
taxes, and tips relating to the meal. You can deduct either the actual cost
or a standard amount. See Standard Meal Allowance later in this section.

80% limit on meals. You can deduct only 80% of the cost of your business-
related meals unless you are reimbursed for these expenses. This limit applies
whether the unreimbursed meal expense is for business travel or business
entertainment. The 80% limit is explained later under Entertainment Expenses.

Lavish or extravagant. You cannot deduct expenses for meals to the extent they
are lavish or extravagant. An expense is not considered lavish or extravagant
if it is reasonable based on the facts and circumstances. Expenses will not
be disallowed merely because they are more than a fixed dollar amount or take
place at deluxe restaurants, hotels, night clubs, or resorts.

Cleaning and laundry expenses. You can deduct reasonable laundry expenses
while traveling away from home on business.

Telephone expenses. You can deduct the cost of business calls while you are
traveling away from home. This includes the cost of business communication by
fax machine or other devices.

Tips. You can deduct tips you pay for any of the expenses in this section.

Other expenses. You can deduct other similar ordinary and necessary expenses
that are related to your business travel. Such expenses might include the
costs of operating and maintaining a house trailer, public stenographer's
fees, and computer rental fees.

Expenses for your spouse. If your spouse goes with you on a business trip or
to a business convention, you cannot deduct the part of the expenses that is
for travel, meals, and lodging for your spouse, unless you can prove a real
business purpose for your spouse's presence. Incidental services, such as
typing notes or assisting in entertaining customers, are not enough to
warrant a deduction.

Example. You drive to Chicago on business and take your spouse with you. No
business purpose is served by your spouse's presence. You pay $115 a day for a
double room. A single room costs $90 a day. You can deduct the total cost of
driving your car to and from Chicago, but only $90 a day for your hotel room.
If you use public transportation, you can deduct only your fare.

Standard Meal Allowance

You can deduct a standard amount for your daily meals while you are traveling
away from home on business. This method replaces the actual cost method and
allows you to deduct a set amount, depending on where you travel, instead
of keeping records of actual meal expenses. If you use the standard meal
allowance, you still must keep records to prove the time, place, and
business purpose of your travel. See the recordkeeping rules for travel,
explained later in this chapter under Recordkeeping.

Who can use the standard meal allowance. You can use the standard meal
allowance whether you are an employee or self-employed. You cannot use the
standard meal allowance, however, if you are related to your employer as
defined below.

You can use the standard meal allowance whether or not you are reimbursed for
your traveling expenses. However, if you are not reimbursed for meal expenses,
you can deduct only 80% of the standard meal allowance. This 80% limit is
figured when you complete Form 2106 or Schedule C of Form 1040.

           Locations Eligible for $34 a Day Standard Meal Allowance

         City                            County (1)
         California
         Death Valley                    Inyo
         Los Angeles                     Los Angeles, Kern,
                                         Orange, Ventura;
                                         Edwards AFB, China
                                         Lake Naval Center
         Oakland                         Alameda, Marin,
                                         Contra Costa
         Palm Springs                    Riverside
         Sacramento                      Sacramento
         San Diego                       San Diego
         San Francisco                   San Francisco
         San Jose                        Santa Clara
         San Luis Obispo                 San Luis Obispo
         San Mateo                       San Mateo
         Santa Barbara                   Santa Barbara
         Santa Cruz                      Santa Cruz
         South Lake Tahoe                El Dorado
         Tahoe City                      Placer
         Yosemite National
         Park                            Mariposa

         Colorado
         Aspen                           Pitkin
         Boulder                         Boulder
         Denver                          Denver, Adams,
                                         Arapahoe, Jefferson
         Keystone/
         Silverthorne                    Summit
         Vail                            Eagle

         Connecticut
         Hartford                        Hartford, Middlesex
         Salisbury                       Litchfield

         District of Columbia
         Washington, DC                  Virginia counties of
                                         Arlington, Loudoun, and
                                         Fairfax and cities
                                         Alexandria, Falls Church,
                                         and Fairfax. Maryland
                                         counties of Montgomery
                                         and Prince George's

         Florida
         Key West                        Monroe
         Miami                           Dade
         West Palm Beach                 Palm Beach

         Georgia
         Atlanta                         Clayton, De Kalb,
                                         Cobb, Fulton

         Illinois
         Chicago                         Cook, Lake, Du Page

         Louisiana
         New Orleans                     Jefferson, St. Bernard,
                                         Orleans, Plaquemines

         Maryland (see also District of Columbia)
         Annapolis                       Anne Arundel
         Baltimore                       Baltimore, Harford
         Columbia                        Howard
         Ocean City                      Worcester

         Massachusetts
         Andover                         Essex
         Boston                          Suffolk
         Lowell                          Middlesex
         Martha's Vineyard/
         Nantucket                       Nantucket, Dukes
         Quincy                          Norfolk

         Michigan
         Detroit                         Wayne

         Nevada
         Las Vegas                       Clarke; Nellis AFB

         New Jersey
         Atlantic City                   Atlantic
         Eatontown                       Monmouth; Fort Monmouth
         Edison                          Middlesex
         Newark                          Bergen, Essex, Hudson,
                                         Passaic, Union
         Ocean City/Cape May             Cape May
         Princeton/Trenton               Mercer

         New Mexico
         Cloudcroft                      Otero
         Santa Fe                        Santa Fe

         New York
         Monticello                      Sullivan
         New York City                   Bronx, Brooklyn, Manhattan,
                                         Staten Island, Queens;
                                         Nassau, Suffolk
         Saratoga Springs                Saratoga
         White Plains                    Westchester

         Ohio
         Cleveland                       Cuyahoga

         Pennsylvania
         Chester/Radnor                  Delaware
         King of Prussia/
         Fort Washington                 Montgomery
         Philadelphia                    Philadelphia
         Valley Forge                    Chester

         Rhode Island
         Newport                         Newport

         South Carolina
         Hilton Head                     Beaufort

         Texas
         Dallas/Fort Worth               Dallas, Tarrant
         Houston                         Harris; LBJ Space
                                         Center, Ellington AFB

         Virginia (see also District of Columbia)
         Williamsburg

         Washington
         Seattle                         King

        (1)Includes parishes, boroughs, military installations, etc.

Related to employer. You are related to your employer if:

1)  Your employer is your brother or sister, half-brother or half-sister,
    spouse, ancestor, or lineal descendent,

2)  Your employer is a corporation in which you own, directly or indirectly,
    more than 10% in value of the outstanding stock, or

3)  Certain fiduciary relationships exist between you and your employer
    involving grantors, trusts, beneficiaries, etc.

You may be considered to indirectly own stock, for purposes of (2) above, if
you have an interest in a corporation, partnership, estate, or trust which
owns the stock or if a family member or partner owns the stock.

Amount of standard meal allowance. The standard meal allowance is $26 a day
for most areas in the United States. Other locations in the United States are
designated as high-cost areas, qualifying for a standard meal allowance of $34
a day. The Locations Eligible for $34 a Day Standard Meal Allowance chart on
the previous page shows the locations qualifying for the $34 a day rate. If
you work in the transportation industry, however, see Special rate for
transportation workers, later in this section.

The $26 and $34 standard meal allowance rates do not apply to travel in
Alaska, Hawaii, or any other locations outside the continental United States.
The standard meal allowance for these areas is 40% of the total federal
per diem (which includes lodging). Your employer should have these rates
available.

Example. You regularly live and work in Chicago. You sometimes travel
overnight to Omaha for business. Your employer expects you to pay your
expenses out of your regular salary and does not separately or specifically
reimburse your expenses for business trips. You must keep receipts to prove
the amount of your lodging expense. You can claim the standard meal allowance
for Omaha, $26, on your Form 2106. You are subject to the 80% limit on meal
and entertainment expenses. You are also subject to the 2% of adjusted gross
income limit which applies to most other miscellaneous itemized deductions.

Special rate for transportation workers. You may be able to use a special
standard meal allowance if you work in the transportation industry. You are
in the transportation industry if your work:

1)  Directly involves moving people or goods by airplane, barge, bus, ship,
    train, or truck, and

2)  Regularly requires you to travel away from home and, usually part of each
    trip is in an area eligible for the regular $26 rate and part of each
    trip is in an area eligible for the $34 rate.

If this applies to you, you can claim a $30 a day standard meal allowance ($34
for travel outside the continental United States). If you choose to use this
rate for any trip, you must use this rate (and not the regular standard meal
allowance) for all trips you take that year.

Travel for less than 24 hours. If you are not traveling for the entire 24─hour
day, you must prorate the standard meal allowance. You can do so by dividing
the day into 6─hour quarters. The 6─hour quarters are:

1)  Midnight to 6 a.m.,

2)  6 a.m. to noon,

3)  Noon to 6 p.m., and

4)  6 p.m. to midnight.

You can claim one-fourth of the full day standard meal allowance for each
6─hour quarter of the day during any part of which you are traveling away
from home.

Example 1. You live and work in Los Angeles. Your employer sends you to San
Francisco on a temporary assignment. You leave home at 8 a.m. on March 20.
Your assignment is completed on March 23. You arrive home at 4 p.m. on that
day. You are considered to be traveling for 3-1/2 days (a -3/4 day on March 20
+ 2 full days + a -3/4 day on March 23). Your standard meal allowance is $119
(3-1/2 * $34) while on this assignment.

Example 2. Maria is employed in Milwaukee as a convention planner. In April
1992, she went on a one-week business trip. She left her home in Milwaukee at
7 a.m. on April 9 and flew to Washington, DC, where she spent two nights. She
then went to Albany, NY, arriving there at 4 p.m. on April 11. After three
nights in Albany, she went to New York City to attend a planning seminar at
her employer's request. She arrived at 1 p.m. on April 14. On April 16, she
flew back to Milwaukee, arriving at her home at 5:45 p.m.

Maria decides to use the standard meal allowance and arrives at her expense
as follows:

                       Number     Allowance
     City          of Days      Amount      Total

     Washington, DC         1              $34            59.50
     Albany, NY             3              $26            78.00
     New York City          2              $34            93.50
                                                       __________
                                                        $231.00
                                                       ==========

Maria's total standard meal allowance for the trip is $231.00 ($59.50 + $78.00
+ $93.50). If her employer does not reimburse her for her meals, Maria will
be able to deduct 80% of her unreimbursed meals. She will figure this on Form
2106.

Standard meal allowance not allowed. You cannot use the standard meal
allowance to prove the amount of your meals if you are traveling for medical,
charitable, or moving purposes. However, you can use it if you are traveling
for investment reasons. You can also use the standard meal allowance to prove
meal expenses you incurred in connection with qualifying educational expenses
while traveling away from home. Chapter 29 discusses deductible educational
expenses.

Travel in the United States

The following discussion applies to travel in the United States. For
this purpose, the United States includes the 50 states and the District of
Columbia. The treatment of your travel expenses depends on how much of your
trip was business-related and on how much of your trip occurred within the
United States.

Trip Primarily For Business

You can deduct all your travel expenses if your trip was entirely business
-related. If your trip was primarily for business and, while at your business
destination, you extended your stay for a vacation, made a nonbusiness side
trip, or had other nonbusiness activities, you can deduct the travel expenses
to and from your business destination, and you can deduct any business
-related expenses at your business destination.

Example. You work in Atlanta and take a business trip to New Orleans. On your
way home, you stop in Mobile to visit your parents. You spend $450 for the 9
days you are away from home for travel, meals, lodging, and other travel
expenses. If you had not stopped in Mobile, you would have been gone only 6
days, and your total cost would have been $400. You can deduct $400 for your
trip, including the round-trip transportation to and from New Orleans.

Trip Primarily For Personal Reasons

If your trip was primarily for personal reasons, such as a vacation, the
entire cost of the trip is a nondeductible personal expense. However, you
can deduct any expenses you have while at your destination that are directly
related to your business.

A trip may be a vacation even if the promoter advertises that a trip to
a resort or on a cruise ship is primarily for business. The scheduling of
incidental business activities during a trip, such as viewing video tapes
or attending lectures dealing with general subjects, will not change what
is really a vacation into a business trip.

Part of Trip Outside the United States

If part of your trip is outside the United States, use the rules described
later under  Travel Outside the United States for that part of the trip. For
the part of your trip that is inside the United States, use the rules in this
section. Travel outside the United States does not include travel from one
point in the United States to another point in the United States. The
following discussion can help you determine whether your trip was entirely
within the United States.

Public transportation. If you travel by public transportation, any place in
the United States where that vehicle makes a scheduled stop is a point in the
United States. Once the transportation mode leaves the last scheduled stop
in the United States, you apply the rules under Travel Outside the United
States.

Example 1. You fly from New York to Puerto Rico, with a scheduled stop in
Miami. You return to New York nonstop. The flight from New York to Miami is in
the United States, so only the flight from Miami to Puerto Rico is outside the
United States. All of the return trip is outside the United States, as there
are no scheduled stops between Puerto Rico and New York.

Example 2. You travel by train from New York to Montreal. The travel from New
York to the last scheduled stop in the United States is travel in the United
States.

Private car. Travel by private car in the United States is travel between
points in the United States, even when you are on your way to a destination
outside the United States.

Example. You travel by car from Denver to Mexico City and return. Your travel
from Denver to the border and from the border to Denver is travel in the
United States, and the rules in this section apply. The rules under Travel
Outside the United States apply to your trip from the border to Mexico City
and back to the border.

Private plane. If you travel by private plane, any trip, or part of a trip,
for which both your takeoff and landing are in the United States is travel
in the United States, even if part of your flight is over a foreign country.

Example. You fly nonstop from Seattle to Juneau. Although the flight passes
over Canada, the trip is considered to be travel in the United States.

Travel Outside the United States

If any part of your business travel is outside the United States, some of
your travel expense deductions of getting to and from your destination may
be limited. For this purpose, the United States includes the 50 states and
the District of Columbia.

How much of your travel expenses is deductible depends in part upon how much
of your trip outside the United States was business related.

The rules for travel inside the United States were discussed in the previous
section.

See Chapter 1 of Publication 463 for information on luxury water travel.

Travel Entirely For Business

If you travel outside the United States and you spend the entire time on
business activities, all your expenses of getting to and from your business
destination are deductible.

In addition, even if you do not spend your entire time on business activities,
your trip is considered entirely for business, and you can deduct all of your
business-related travel expenses if you meet one of the following four
conditions:

1)  You did not have substantial control over arranging the trip. You are not
    considered to have substantial control merely because you control the
    timing of your trip.

    You are considered not to have substantial control over your trip if you:

    a)  Are an employee who was reimbursed or paid a travel expense
        allowance,

    b)  Are not related to your employer, and

    c)  Are not a managing executive.

    "Related to your employer" was defined earlier in this chapter under
    Standard Meal Allowance. A managing executive is an employee who, because
    of executive authority and responsibility, is authorized, not subject to
    the veto of another, to decide on the need for the business travel.

    A self-employed person is generally regarded as having substantial
    control over arranging business trips.

2)  You were outside the United States a week or less, combining business
    and nonbusiness activities. One week means seven consecutive days. In
    counting the days, do not count the day you leave the United States,
    but count the day you return to the United States.

    Example. You traveled to Paris primarily for business. You left Denver
    on Tuesday and flew to New York. On Wednesday, you flew from New York
    to Paris, arriving the next morning. On Thursday and Friday, you
    had business discussions, and from Saturday until Tuesday, you were
    sightseeing. You flew back to New York, arriving Wednesday afternoon. On
    Thursday, you flew back to Denver. Although you were away from your home
    in Denver for more than a week, you were not outside the United States
    for more than a week because the day of departure does not count as a day
    outside the United States. You can deduct your cost to fly from Denver to
    Paris, conduct your business, and return to Denver. You cannot deduct the
    cost of your stay in Paris from Saturday through Tuesday because it was
    not for business.

3)  You spent less than 25% of the total time you were outside the United
    States in nonbusiness activities, even if the trip outside the United
    States was for more than a week. For this purpose, count both the day
    your trip began and the day it ended.

    Example. You flew from Seattle to Tokyo, where you spent 14 days on
    business and 5 days on personal matters. You then flew back to Seattle.
    You spent one day flying in each direction. Because only 5/21 (less than
    25%) of your total time abroad was for nonbusiness activities, you can
    deduct as travel expenses what it would have cost you to make the trip
    if you had not engaged in any nonbusiness activity. The amount you can
    deduct is the cost of the round-trip plane fare and 16 days of meals
    (subject to the 80% limit), lodging, and other related expenses.

4)  You can establish that a personal vacation was not a major consideration,
    even if you own your business, are related to your employer, are a
    managing executive, or have substantial control over arranging the trip.

If you do not meet any of these conditions, you may still be able to deduct
some of your expenses. See Travel Primarily For Business, next.

Travel Primarily For Business

If you traveled outside the United States primarily for business purposes, but
spent at least 25% of your time on nonbusiness activities, your travel expense
deductions are limited unless you meet one of the four conditions listed
earlier under  Travel Entirely For Business. If your deductions are limited,
you must allocate your travel expenses of getting to and from your destination
between business and nonbusiness activities to determine your deductible
amount.

Travel allocation rules. If your trip was not entirely for business, you must
allocate your travel expenses on a day-to-day basis between days you conducted
business and days you did not conduct business.

To figure the deductible amount of your round-trip travel expenses between the
United States and your business destination, multiply the total cost by the
following fraction. The numerator (top number) is the total number of business
days. The denominator (bottom number) is the total number of all days outside
the United States. The day of your departure from the United States and the
day you return to the United States are both counted as days outside the
United States.

Counting business days. Your business days include transportation days, days
your presence was required, days you spent on business, and certain weekends
and holidays.

Transportation day. Count as a business day any day you spend traveling to or
from a business destination. However, if because of a nonbusiness activity you
do not travel by a direct route, your business days are the days it would have
taken you to travel a reasonably direct route to your business destination.
Extra days for side trips or nonbusiness activities cannot be counted as
business days.

Presence required. Count as a business day any day that your presence is
required at a particular place for a specific business purpose, even if you
spend most of the day on nonbusiness activities.

Day spent on business. If your principal activity during working hours is in
pursuit of your trade or business, the day is counted as a business day. Also,
count as a business day any day you are prevented from working because of
circumstances beyond your control.

Certain weekends and holidays. Weekends, holidays, and other necessary standby
days are counted as business days if they fall between business days. But if
they follow your business meetings or activity and you remain at your business
destination for nonbusiness or personal reasons, they are not business days.

Example 1. Your tax home is in New York City. You travel to Quebec where
you have a business appointment on Friday. You have another appointment on
the following Monday. Because you had a business activity on Friday and had
another business activity on Monday, the days in between are counted as
business days, even though you use that time for sightseeing, personal
visiting, or other nonbusiness activities.

Example 2. If, in Example 1, you had no other business in Quebec after Friday,
but stayed until Monday before starting home, Saturday and Sunday would be
nonbusiness days.

Nonbusiness activity on the route to or from your business destination. If
you had a vacation or other nonbusiness activity between the United States and
your business destination, or between your business destination and the United
States, you must allocate your travel expenses between business and
nonbusiness days. You can do so as follows:

1)  Divide the number of business days by the total number of travel days.

2)  Multiply the result in (1) by the cost of round-trip travel between the
    United States and your nonbusiness destination.

3)  Add to the result in (2) the round-trip cost of travel between the United
    States and your business destination minus the round-trip cost of travel
    between the United States and your nonbusiness destination. This result
    is the deductible part of your cost of getting to and from your business
    destination.

4)  Add to (3) your business travel expenses while at your business
    destination to get your total allowable travel expenses.

Example. You live in New York and flew to Brussels on Thursday, May 24, to
attend a conference with a customer that began at noon Friday, May 25. The
conference ended at noon Monday, May 28. That evening you flew to Dublin where
you visited with friends until the afternoon of June 10, when you flew home
to New York. The primary purpose for the trip was to attend the conference.

If you had not stopped in Dublin, you would have arrived home the evening
of May 28. You were outside the United States more than a week, and you are
unable to show that you had no substantial control over arranging the trip, or
that a personal vacation was not a major consideration in making the trip. May
24 through May 28 (5 days) are business days and May 29 through June 10 (13
days) are nonbusiness days. You cannot deduct your expenses while in Dublin.
You also cannot deduct 13/18 of the cost of round-trip airfare and any other
expenses from New York to Dublin.

You can deduct the cost of your meals, lodging, and other business-related
travel expenses while in Brussels. You figure the deductible part of your
travel between the United States and Brussels as follows:

1)  5/18 of the round-trip airfare and other expenses between New York and
    Dublin, plus

2)  The cost of the round-trip fare and any other expenses between New York
    and Brussels minus the cost of the round-trip fare and any other expenses
    between New York and Dublin.

Assume the round-trip plane fare and other expenses between New York and
Brussels are $800 and $600 between New York and Dublin. Your deductible
plane fare and other expenses are $366.67 [(5/18 * $600) + ($800 - $600)].

Nonbusiness activity at or beyond business destination. If you had a vacation
or other nonbusiness activity at or beyond your business destination, you
must allocate your travel expenses between your business and nonbusiness days.
None of your travel expenses for nonbusiness activities at or beyond your
business destination are deductible. You must also allocate your round-trip
transportation and other costs between the United States and your business
destination as follows.

Multiply the cost of your round-trip travel between the United States and your
business destination by a fraction. The numerator (top number) is the number
of business days. The denominator (bottom number) is the total number of
travel days. Add to this result your business-related travel expenses at
your business destination. The sum is your total deductible travel expenses.

Example. Assume that the dates are the same as in the prior example but that
instead of going to Dublin for your vacation, you fly to Venice, Italy, for a
vacation. You cannot deduct any part of the cost of your trip from Brussels
to Venice and return to Brussels. In addition, you cannot deduct 13/18 of the
airfare and other expenses from New York to Brussels and back to New York. You
may deduct 5/18 of the round-trip plane fare and other expenses from New York
to Brussels, plus your meals, lodging, and any other business expenses you had
in Brussels. If the round-trip plane fare and other expenses are $800 from New
York to Brussels, you can deduct travel costs of $222.22 (5/18 * $800).

Other methods. You can use another method of counting business days if you
establish that it more clearly reflects the time spent on nonbusiness
activities outside the United States.

Travel Primarily For Vacation

If your travel was primarily for vacation, or for investment purposes, and
you spent some time attending brief professional seminars or a continuing
education program, the entire cost of the trip is a nondeductible personal
expense, except for registration fees and any other expenses incurred that
were directly related to your business.

Example. You are a doctor practicing medicine and are a member of a
professional association. The association sponsored a 2─week trip to two
foreign countries with three professional seminars in each country. Each
seminar was 2 hours long and was held in a different city. You also made
an optional side trip to a well-known tourist attraction in each of the
countries visited. At the end of the trip you received a Certificate of
Continuing Education in Medicine.

You paid the cost of air fare, hotel accommodations, meals, a special escort,
transportation to and from hotels, and tips. No part of the cost you paid was
for the seminars, which were arranged for you by the sponsoring professional
association.

Your participation in the professional seminars did not change what was
essentially a vacation into a business trip. Your travel expenses were not
related primarily to your business. You had no other expenses that were
directly for your business. Therefore, you cannot deduct the cost of your
trip as an ordinary and necessary business expense.

Conventions

You can deduct travel expenses for yourself, but not for your family, when you
attend a convention if you can show that your attendance benefits your trade
or business. If the convention is for investment, political, social, or other
purposes unrelated to your trade or business, you cannot deduct the expenses.
Nonbusiness expenses, such as social or sightseeing expenses, are personal
expenses and are not deductible. Your appointment or election as a delegate
does not, in itself, entitle you to or deprive you of a deduction.

Convention agenda. The agenda of the convention does not have to deal
specifically with your official duties or the responsibilities of your
position or business. It is enough if the agenda is so related to your
active trade or business and your responsibilities that attendance for
a business purpose is justified.

Expenses paid by others. You cannot deduct expenses paid by others or personal
expenses you paid for your family members. You must reduce the expenses you
pay by reimbursements or allowances you received from others.

Foreign conventions. See Chapter 1 of Publication 463 for information on
conventions held outside the North American area.

Entertainment Expenses

You may be able to deduct business-related entertainment expenses you have to
entertain a client, customer, or employee.

To be deductible, the expense must be both ordinary and necessary. An ordinary
expense is one that is common and accepted in your field of business, trade,
or profession. A necessary expense is one that is helpful and appropriate for
your business. An expense does not have to be indispensable to be considered
necessary.

In addition, the entertainment expense must meet one of two tests:

1)  Directly-related test, or

2)  Associated test.

You must also meet the requirements discussed later in this chapter under
Recordkeeping.

Even if you meet all the requirements for claiming a deduction for
entertainment expenses, the amount you can deduct may be limited. Generally,
you can deduct only 80% of your unreimbursed entertainment expenses. This
limit is discussed later in this section under 80% Limit.

Entertainment. Entertainment includes any activity generally considered to
provide entertainment, amusement, or recreation. Examples include entertaining
guests at night clubs; at social, athletic, and sporting clubs; at theaters;
at sporting events; on yachts; or on hunting, fishing, vacation, and similar
trips. If you buy a ticket to an entertainment event for a client, you
generally cannot deduct more than the face value of the ticket.

A meal as a form of entertainment. Entertainment includes the cost of a meal
you provide to a customer or client. It does not matter whether the meal is a
part of other entertainment. A meal sold as a normal course of your business
is not entertainment. Generally, to deduct an entertainment-related meal, you
or your employee must be present when the food or beverages are provided.

A meal expense includes the cost of food, beverages, taxes, and tips for the
meal.

No double deduction allowed for meals. You cannot claim the cost of your meal
as an entertainment expense if you are also claiming the cost of your meal as
a travel expense.

Taking turns paying for meals or entertainment. Expenses are not deductible
when a group of business acquaintances take turns picking up each other's meal
or entertainment checks without regard to whether any business purposes are
served.

Additional information. For more information on entertainment expenses,
including discussions of the directly-related and associated tests and
entertainment facilities, see Chapter 2 of Publication 463.

80% Limit

In general, you can deduct only 80% of your business-related meal and
entertainment expenses. This limit applies to employees or their employers,
and to self-employed persons (including independent contractors) or their
clients, depending on whether the expenses are reimbursed.

The 80% limit applies to meals or entertainment expenses incurred while:

1)  Traveling away from home (whether eating alone or with others) on
    business,

2)  Entertaining business customers at your place of business, a restaurant,
    or other location, or

3)  Attending a business convention or reception, business meeting, or
    business luncheon at a club.

Taxes and tips relating to a business meal or entertainment activity are
included in the amount that is subject to the 80% limit. Expenses such as
cover charges for admission to a night club, rent paid for a room in which you
hold a dinner or cocktail party, or the amount paid for parking at a sports
arena are also subject to the 80% limit. However, the cost of transportation
to and from a business meal or a business-related entertainment activity is
not subject to the 80% limit.

If you pay or incur an expense for goods and services consisting of meals,
entertainment, and other services (such as lodging or transportation), you
must allocate between the expenses for meals and entertainment and the
expenses for the other services. You must have a reasonable basis for making
this allocation. For example, you must allocate your expenses if a hotel
includes one or more meals in its room charge, or if you are provided with
one per diem amount to cover both your lodging and meal expenses.

Application of 80% limit. The 80% limit on meal and entertainment expenses
applies if the expense is otherwise deductible and is not covered by one of
the exceptions discussed later in this section.

The 80% limit also applies to other expenses in addition to trade or business
expenses. It applies to expenses incurred for the production of income
including rental or royalty income. It also applies to deductible moving
and educational expenses.

When to apply the 80% limit. You apply the 80% limit after determining the
amount that would otherwise qualify for a deduction. You first determine the
amount of meal and entertainment expenses that would be deductible under the
rules discussed in this chapter.

You then apply the 80% limit. If you are an employee, use Form 2106 to figure
the limit. If you are self-employed, use Schedule C of Form 1040 to figure the
limit.

Finally, to determine the actual amount you can deduct if you are an employee,
you must apply the 2% of adjusted gross income limit on Schedule A (Form
1040).

Example 1. You spend $100 for a business-related meal. If $40 of that amount
is not allowable because it is considered lavish and extravagant, the
remaining $60 is subject to the 80% limit. Your deduction cannot be more
than $48 (.80 * $60).

Example 2. You purchase two tickets to a concert and give them to a client.
You purchased the tickets through a ticket agent. You paid $150 for the two
tickets, which had a face value of $60 each ($120 total). Your deduction
cannot be more than $96 (.80 * $120).

Exceptions to the 80% Limit

The 80% limit on meal and entertainment expenses applies if the expense is
otherwise deductible based on the tests and rules explained in this chapter.

Your meal or entertainment expense is not subject to the 80% limit if the
expense meets one of the following exceptions.

Employee's reimbursed expenses. As an employee, you are not subject to the 80%
limit if your employer reimburses you under an accountable plan and does not
treat your reimbursement as wages. Accountable plans are discussed later in
this chapter under Reimbursements.

This exception does not apply to the cost of meals you are claiming as moving
expenses. You are subject to the 80% limit on the cost of these meals even
if your employer reimburses you for the expense. For more information, see
Chapter 27.

Director, stockholder, or employee meetings. You can deduct expenses that
are 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 the company's
business. Expenses under this exception are subject to the 80% limit.

Trade association meetings. You can deduct expenses that are 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, trade associations, and professional
associations. The expenses of your attendance must be related to your
active trade or business. These expenses are subject to the 80% limit on
entertainment expenses.

Business Gift Expenses

If you give business gifts in the course of your trade or business, you can
deduct the cost subject to the limits and rules in this section.

Limit on business gifts. You can deduct no more than $25 for business gifts
you give directly or indirectly to any one person during your tax year. A gift
to a company that is intended for the eventual personal use or benefit of a
particular person or a limited class of people will be considered an indirect
gift to that particular person or to the individual within that class of
people who receives the gift.

A gift to the spouse of a business customer or client is an indirect gift to
the customer or client. However, if you have an independent bona fide business
connection with the spouse, the gift generally will not be considered an
indirect gift to the other spouse, unless it is intended for that spouse's
eventual use or benefit. These rules also apply to gifts to any other family
member.

If you and your spouse both give gifts, both of you are treated as one
taxpayer. It does not matter whether you have separate businesses or are
separately employed, or whether each of you has an independent connection
with the recipient. If a partnership gives gifts, the partnership and the
partners are treated as one taxpayer.

Incidental costs. Incidental costs, such as engraving on jewelry, or
packaging, insuring, and mailing, are generally not included in determining
the cost of a gift for purposes of the $25 rule.

A related cost is considered incidental only if it does not add substantial
value to the gift. For example, the cost of gift wrapping is considered an
incidental cost, but the purchase of an ornamental basket for packaging fruit
is not considered an incidental cost of packaging if the basket has a
substantial value compared to the value of the fruit.

Exceptions. The following items are not subject to the $25 limit for business
gifts.

1)  An item that costs $4 or less and:

    a)  Has your name clearly and permanently imprinted on the gift, and

    b)  Is one of a number of identical items you widely distribute.
         Examples include pens, desk sets, and plastic bags and cases.

2)  Signs, display racks, or other promotional material to be used on the
    business premises of the recipient.

Employee achievement awards. Employee achievement awards are not treated as
gifts. For information on how to deduct the cost of these awards, see Chapter
2 of Publication 535.

Gift or entertainment. Any item that might be considered either a gift or an
entertainment expense generally will be considered an entertainment expense.
However, if you give a customer packaged food or beverages that you intend
the customer to use at a later date, treat it as a gift expense.

If you give tickets to a theater performance or sporting event to a business
customer and you do not go with the customer to the performance or event, you
can choose to treat the tickets as either a gift or entertainment expense,
whichever is to your advantage.

You can change your treatment of the tickets at a later date, but not after
the time prescribed for the assessment of income tax. In most instances, this
assessment period ends 3 years after the due date of your income tax return.
But if you go with the customer to the event, you must treat the cost of the
tickets as an entertainment expense. You cannot choose, in this case, to treat
the tickets as a gift expense.

Local Transportation Expenses

This section discusses expenses you can deduct for local business
transportation. It also discusses deductions you can take for business
use of your car, whether you use it for business-related local transportation
or for traveling away from home on business.

Local business transportation expenses include the cost of transportation by
air, rail, bus, taxi, etc., and the cost of driving and maintaining your car.

Local transportation expenses include the ordinary and necessary expenses of
getting from one work place to another in the course of your business
or profession when you are traveling within your tax home area. Local
transportation expenses also include the cost of getting from your home
to a temporary work place when you have one or more regular places of work.

Local business transportation does not include expenses you have while
traveling away from home. Transportation expenses you can deduct while
traveling away from home and the definition of tax home are discussed
earlier in this chapter under Travel Expenses.

You can deduct your expenses for local business transportation, including the
business use of your car, if the expenses are ordinary and necessary. An
ordinary expense is one that is common and accepted in your field of trade,
business, or profession. A necessary expense is one that is helpful and
appropriate for your business. An expense does not have to be indispensable
to be considered necessary.

Commuting expenses. You cannot deduct the costs of taking a bus, trolley,
subway, taxi, or driving a car between your home and your main or regular
place of work. These costs are personal commuting expenses. You cannot deduct
commuting expenses no matter how far your home is from your regular place of
work. You cannot deduct commuting expenses even if you work during the
commuting trip.

Example. You had a telephone installed in your car. You sometimes use that
telephone to make business calls while commuting to and from work. Sometimes
business associates ride with you to and from work, and you have a business
discussion in the car. These activities do not change the trip's expenses
from commuting to business. Your commuting expenses are not deductible.

Parking fees. Fees you pay to park your car at your place of business are
nondeductible commuting expenses. You can, however, deduct business-related
parking fees when visiting a customer or client.

Advertising display on car. The use of your car to display material that
advertises your business does not change the use of your car from personal
use to business use. If you use this car for commuting or other personal uses,
your commuting or personal expenses are not deductible.

Deductible local transportation. The following examples illustrate when you
can deduct local transportation expenses based on the location of your work
and your residence.

Example 1. Your office is in the same city as your home. You cannot deduct the
cost of transportation between your home and your office; this is a personal
commuting expense. You can deduct the cost of round-trip transportation
between your office and a client or customer's place of business.

Example 2. You regularly work in an office in the city where you live. Your
employer requires that you attend a one-week training session at a different
office in the same city. You travel directly from your home to the training
site and return each day. You can deduct the cost of your daily round-trip
transportation between your home and the training site.

Example 3. Your only office is in your home. (The rules for "office in
the home" are discussed in Chapter 30.) You can deduct the round-trip
business-related local transportation expenses between your home office and
your client's or customer's place of business. You must, however, distinguish
between business and personal transportation.

Example 4. You have no regular office, and you do not have an office in your
home. In this case, the location of your first business contact is considered
your office. Transportation expenses between your home and this first contact
are nondeductible commuting expenses. In addition, transportation expenses
between your last business contact and your home are also nondeductible
commuting expenses. Although you cannot deduct the costs of these first and
last trips, you can deduct the costs of going from one client or customer
to another.

Temporary work location. If you have one or more regular places of business
and commute to a temporary work location, you can deduct the expenses of the
daily round-trip transportation between your residence and the temporary
location. The temporary work must be irregular or short term (generally a
matter of days or weeks).

If the temporary work location is beyond the general area of your regular
place of work, and you stay overnight, you are traveling away from home and
may have deductible travel expenses as discussed earlier in this chapter.

If you do not have a regular place of work, but you ordinarily work in the
metropolitan area where you live, you can deduct daily transportation costs
between your home and a temporary work site outside your metropolitan area.
However, you cannot deduct daily transportation costs between your home and
temporary work sites within your metropolitan area.

Two places of work. If you work at two places in a day, whether or not for the
same employer, you can deduct the expense of getting from one work place to
the other. However, if for some personal reason you do not go directly from
one location to the other, you can deduct only the amount it would have cost
you to go directly from the first location to the second. Transportation
expenses you have in going between home and a part-time job on a day off
from your main job are commuting expenses. You cannot deduct them.

Armed forces reservists. A meeting of an armed forces reserve unit is
considered a second place of business if the meeting is held on the same day
as your regular job. You can deduct the expense of getting to or from one work
place to the other as just discussed. You usually cannot deduct the expense
if the meeting is held on a nonworkday for your regular job.

For meetings held on nonworkdays, you can deduct your round-trip daily
transportation expenses only if the location of the meeting is temporary
and you have one or more regular places of work.

If you ordinarily work in a particular metropolitan area but not at any
specific location and the reserve meeting is held at a temporary location
outside that metropolitan area, you can deduct your daily transportation
expenses.

If you travel away from home overnight to attend a guard or reserve meeting,
you can deduct your expenses for meals, lodging, and your round-trip
transportation between your home and the meeting site. For more
information, see Travel Expenses earlier in this chapter.

Car Expenses

If you use your car for business purposes, you may be able to deduct car
expenses. You generally can use one of two methods to figure your expenses:
actual expenses or the standard mileage rate.

            Cars Placed in Service After 1984 - Maximum Limits (1)

    Placed in Service
                                 Depreciation         Depreciation
    After         Before         First Year (2)        Later Years

    1984          4/3/85            $4,100               $6,200 (4)
    4/2/85         1986             $3,200               $4,800 (4)
    1985           1987 (3)         $3,200               $4,800 (4)
    1986           1989             $2,560               $4,100 2nd yr.
                                                          2,450 3rd yr.
                                                          1,475 (4)
    1988                            $2,660               $4,200 2nd yr.
                                                          2,550 3rd yr.
                                                          1,475 (4)
    1990                            $2,660               $4,300 2nd yr.
                                                          2,550 3rd yr.
                                                          1,575 (4)
    1991                            $2,760               $4,400 2nd yr.
                                                          2,650 3rd yr.
                                                          1,575 (4)

   (1) These amounts must be reduced if the car is used less than 100% for
   business purposes.
   (2) This is the maximum amount of your section 179 deduction and
   depreciation allowed for the tax year the car is placed in service.
   (3) You could have elected to apply the amounts shown on the "After
   1986" line to cars placed in service after July 31, 1986. An investment
   credit of $675 was allowed if the car qualified as transition property.
   The reduced investment credit did not apply.
   (4) This amount is also the limit on deductions taken in years after
   the recovery period.

Car expense records. Whether or not you use actual expenses or the standard
mileage rate, you must keep records to show when you started using your car
for business and the cost or other basis of the car. Your records must also
show the business miles you drove your car during the year and the total miles
you drove your car during the year. If you use actual expenses, you must keep
records of the costs of operating the car, such as car insurance, interest,
taxes, licenses, maintenance, repairs, depreciation, gas, and oil. If you
lease a car, you must also keep records of this cost.

Actual Expenses

If you choose to deduct actual expenses, you can deduct the cost of the
following items:

        Gas                Garage rent           Repairs
        Oil                Lease fees            Licenses
        Tolls              Rental fees           Insurance
        Parking            Depreciation

Interest. Beginning after 1990, if you are an employee, you cannot deduct any
interest paid on a car loan. This interest is treated as personal interest and
is not deductible. However, if you are self-employed and use your car in that
business, see Chapter 6 of Publication 535.

Taxes on your car. If you are an employee, you can deduct property taxes you
paid on your car only if you itemize deductions on Schedule A (Form 1040).
(See Chapter 23 for more information on taxes.) You cannot deduct luxury or
sales tax, even if you use your car 100% for business as an employee. Luxury
and sales tax are part of your car's basis and may be recovered through
depreciation. If you are not an employee, see Chapter 7 of Publication 535.

Business and personal use. If you use your car for both business and personal
purposes, you must divide your expenses between business and personal use.

Example. You are a contractor and drive your car 20,000 miles during the year:
12,000 miles for business use and 8,000 miles for personal use. You can claim
only 60% (12,000 ÷ 20,000) of the cost of operating your car as a business
expense.

Hauling tools or instruments. Hauling tools or instruments in your vehicle
while commuting to and from work does not make your commuting costs
deductible. However, you can deduct additional costs, such as renting a
trailer that is towed by your vehicle, for carrying equipment to and from
your job.

Car pools. You cannot deduct the cost of using your car in a nonprofit car
pool. Do not include any payments you receive from the passengers in your
income. These payments are considered reimbursements of your expenses.
However, if you are in a car pool for a profit, you must include payments
from passengers in your income, and you can deduct your car expenses (using
the rules in this chapter).

Fines and collateral. Fines and collateral for traffic violations are not
deductible.

Fringe benefits. Generally, the value of many fringe benefits provided by your
employer are taxable and must be included in your income as compensation. If
your employer provided you with the use or availability of a vehicle, you
received a fringe benefit. For more information, see Publication 917.

Leasing a car. If you lease a car that you use in your business, you can
deduct the part of each lease payment that is for the use of the car in your
business. You cannot deduct any part of a lease payment that is for commuting
to your regular job or other personal use of the car. You must spread any
advance payments over the entire lease period. You cannot deduct any payments
you make to buy a car even if the payments are called lease payments. If you
lease a car after June 18, 1984, for 30 days or more, you may have to include
in income an amount called the "inclusion amount." For more information, see
Publication 917.

Depreciation and section 179 deductions. If you use your car for business
purposes as an employee or as a sole proprietor, you may be able to claim a
depreciation or section 179 deduction. The amount you may claim depends on the
year you placed the car in service and the amount of your business use. See
the Cars Placed In Service After 1984 - Maximum Limits chart on this page
for information on limits on these deductions.

For more information, see the instructions for Form 2106 (if you are an
employee) or Form 4562 (if you are self-employed). Also see Chapter 2 of
Publication 917 for a detailed discussion of these deductions.

Standard Mileage Rate

Instead of figuring actual expenses, you may be able to use the standard
mileage rate. For 1992, the standard mileage rate is 28 cents a mile for
all business miles.

The standard mileage rate takes the place of certain actual expenses of
operating a car. If you choose to take the standard mileage rate, you
cannot deduct actual operating expenses, such as:

     Depreciation,

     Maintenance and repairs,

     Gasoline (including gasoline taxes),

     Oil,

     Insurance, and

     Vehicle registration fees.

You generally can use the standard mileage rate regardless of whether you
are reimbursed and whether any reimbursement is more or less than the amount
figured using the standard mileage rate. See Reimbursements later in this
chapter.

Choosing the standard mileage rate. If you choose to use the standard mileage
rate in the first year of business use, you are considered to have made an
election not to use the accelerated cost recovery system (ACRS) or the
modified accelerated cost recovery system (MACRS). This is because the
standard mileage rate allows for depreciation. You also cannot claim the
section 179 deduction. If you change to the actual cost method in a later
year, but before your car is considered fully depreciated, you have to
estimate the useful life of the car and use straight line depreciation.

Standard mileage rate not allowed. You cannot use the standard mileage rate
if you:

1)  Do not own the car,

2)  Use the car for hire, for example as a taxi,

3)  Operate two or more cars at the same time (as in fleet operations), or

4)  Claimed a deduction for the car in an earlier year using:

    a)  ACRS or MACRS depreciation,

    b)  A section 179 deduction, or

    c)  Any method of depreciation other than straight line for the
        estimated useful life of the car. (Postal employees should see Rural
        mail carriers, later.)

Parking fees and tolls. In addition to claiming the standard mileage rate, you
can deduct any business-related parking fees and tolls.

Basis of car. To figure gain or loss on a car you used for business, you must
figure its adjusted basis by subtracting from the basis any depreciation you
deducted. If you claimed the standard mileage rate, depreciation was allowed
in the following years at the rates shown below. The depreciation rate was
included in the standard mileage rate for those years. These rates do not
apply for any year in which the actual cost method was used. This depreciation
reduces the basis of your car (but not below zero) in figuring its adjusted
basis when you dispose of it.

        Year                                    Rate per Mile

        1992 .................................   11.5 cents
        1989 ─ 1991...........................     11 cents
        1988 .................................   10.5 cents
        1987 .................................     10 cents
        1986 .................................      9 cents
        1983 ─ 1985...........................      8 cents
        1982 .................................    7.5 cents
        1980 ─ 1981...........................      7 cents

For tax years before 1990, the rates applied to the first 15,000 miles. For
tax years after 1989, the depreciation rate applies to all business miles.

Example. In 1988, you bought a car for exclusive use in your business. The car
cost $14,000. From 1988 through 1992, you used the standard mileage rate to
figure your car expense deduction. You drove your car at least 15,000 business
miles in 1988, and 1989. You drove your car 20,000 miles in 1990, 18,750 miles
in 1991 and 16,000 miles in 1992. The depreciation allowed is figured as
follows:

       Year           Miles x Rate             Amount

       1988           15,000 x .105            $1,575
       1989           15,000 x .11             $1,650
       1990           20,000 x .11             $2,200
       1991           18,750 x .11             $2,063
       1992           16,000 x .115            $1,840
                                             __________
       Total                                   $9,328
                                             ==========

At the end of 1992, your adjusted basis in the car is $4,672 ($14,000 -
$9,328).

Adequate accounting. If you adequately account to your employer for
reimbursements or allowances for the use of your car and your employer does
not include the reimbursed amounts in your income, you can deduct only the
cost that is more than your reimbursement or allowance. See Reimbursements,
later in this chapter.

Example. You drive your car 14,000 miles in your work. You get $900 worth of
gas from your employer, who has a gas pump for the business. You adequately
account to your employer for the gas. The $900 is not included on your Form
W─2. You decide to use the standard mileage rate to figure your car expenses
for 1992. You can deduct $3,020 figured as follows.

     Business miles driven .........................    14,000
     Standard mileage rate .........................     x .28
                                                     __________
     Total expense .................................    $3,920
     Less employer-paid expense ....................       900
     Deductible expense ............................    $3,020
                                                     ==========

Rural mail carriers. If you are a U.S. Postal Service employee who collects
or delivers mail on a rural route, you can use a special 42 cents a mile
standard mileage rate. You can use this special rate for an unlimited number
of miles in 1992. You cannot use this rate if you claimed any depreciation
expense on your car under the actual expense method after 1987.

Recordkeeping

This section discusses the written records you need to keep if you plan to
deduct an expense discussed in this chapter. By keeping timely and accurate
records, you will have support to show the IRS if your tax return is ever
examined. Or, your employer may require proof of expenses for which you are
reimbursed under an accountable plan, as discussed later under Adequate
Accounting.

Proof required. You must be able to prove (substantiate) your deductions for
travel, entertainment, business gift, and local transportation expenses
by adequate records or by sufficient evidence that will support your own
statement. Estimates or approximations do not qualify as proof of an expense.

Chart that shows proof required. The chart shown on the next page summarizes
the factors needed to prove the elements of your expenses for travel,
transportation, meals, entertainment, and gifts. These factors are
discussed in more detail in Chapter 5 of Publication 463.

To deduct these expenses, you must be able to prove the items listed in column
1 of the chart. You prove these items by having the information and receipts
(where required) for the expenses listed in columns 2, 3, 4, or 5, whichever
is applicable.

Adequate records. You should keep the proof you need for these items in an
account book, diary, statement of expense, or similar record, and keep
adequate documentary evidence (such as receipts, canceled checks, or bills),
that together will support each element of an expense. Documentary evidence
is explained in more detail later in this discussion. Written evidence has
considerably more value than oral evidence alone.

Timely recordkeeping. You do not need to write down the elements of every
expense at the time of the expense. However, a record of the elements of an
expense or of a business use made at or near the time of the expense or use,
supported by sufficient documentary evidence, has more value than a statement
prepared later when generally there is a lack of accurate recall. A log
maintained on a weekly basis, which accounts for use during the week, is
considered a record made at or near the time of the expense or use.

Duplicate information. You do not have to record information in your account
book or other record that duplicates information shown on a receipt as long as
your records and receipts complement each other in an orderly manner. You do
not have to record amounts your employer pays directly for any ticket or other
travel item. However, if you charge these items to your employer, through a
credit card or otherwise, you must make a record of the amounts you spend.

Expense accounts. An expense account statement you give your employer, client,
or customer is considered to have been made at or near the time of the expense
or use. The statement must be a copy of your account book, diary, statement of
expense, or similar record.

Separating expenses. Each separate payment usually is considered a separate
expense. If you entertain a customer or client at dinner and then go to the
theater, the dinner expense and the cost of the theater tickets are two
separate expenses. You must record them separately in your records.

Totaling items. You may make one daily entry for reasonable categories of
expenses such as taxi fares, telephone calls, gas and oil, or other incidental
travel costs. Meals should be in a separate category. You should include tips
with the costs of the services you received.

Expenses of a similar nature occurring during the course of a single event
are considered a single expense. For example, if during entertainment at a
cocktail lounge, you pay separately for each serving of refreshments, the
total expense for the refreshments is treated as a single expense.

Documentary evidence. You generally must have documentary evidence, such as
receipts, canceled checks, or bills, to support your expenses. However, this
evidence is not required if:

1)  You have meals or lodging expenses while traveling away from home for
    which you account to your employer under an accountable plan and you use
    a per diem allowance method that includes meals and/or lodging.

2)  You are reimbursed under a mileage allowance.

3)  Your expense, other than lodging, is less than $25.

4)  You have a transportation expense for which a receipt is not readily
    available.

Accountable plans and per diem and mileage allowances are discussed later
in this chapter under Reimbursements.

Adequate evidence. Documentary evidence ordinarily will be considered adequate
if it shows the amount, date, place, and essential character of the expense.

For example, a hotel receipt is enough to support expenses for business travel
if it has:

1)  The name and location of the hotel,

2)  The dates you stayed there, and

3)  Separate amounts for charges such as lodging, meals, and telephone calls.

A restaurant receipt is enough to prove an expense for a business meal if
it has:

1)  The name and location of the restaurant,

2)  The number of people served, and

3)  The date and amount of the expense.

If a charge is made for items other than food and beverages, the receipt must
show that this is the case.

Canceled check. A canceled check, together with a bill from the payee,
ordinarily establishes the cost. However, a canceled check by itself does
not prove a business expense without other evidence to show that it was for
a business purpose.

Business purpose. A written statement of the business purpose of an expense
is generally required. However, the degree of proof varies according to the
circumstances in each case. If the business purpose of an expense is clear
from the surrounding circumstances, a written explanation is not required.

Example. A sales representative who calls on customers on an established sales
route does not have to submit a written explanation of the business purpose
for traveling that route.

Confidential information. Confidential information relating to an element
of a deductible expense, such as the place, business purpose, or business
relationship, need not be put in your account book, diary, or other record.
However, the information has to be recorded elsewhere at or near the time
of the expense and be available to fully prove that element of the expense.

Inadequate records. If you do not have adequate records to prove an element of
an expense, then you must prove the element by:

1)  Your own statement, whether written or oral, that contains specific
    information about the element, and

2)  Other supporting evidence that is sufficient to establish the element.

Additional information for the IRS. The IRS may require additional information
to clarify or to establish the accuracy or reliability of information
contained in your records, statements, testimony, or documentary evidence
before a deduction is allowed.

How long to keep records and receipts. You must keep proof to support your
claim to a deduction as long as your income tax return can be examined.
Generally, it will be necessary for you to keep your records for 3 years from
the date you file the income tax return on which the deduction is claimed. A
return filed early is considered as filed on the due date.

Employees who give their records and documentation to their employers and are
reimbursed for their expenses generally do not have to keep duplicate copies
of this information. However, you may be required to prove your expenses if:

1)  You claim deductions for expenses that are more than reimbursements,

2)  Your expenses are reimbursed under a nonaccountable plan,

3)  Your employer does not use adequate accounting procedures to verify
    expense accounts, or

4)  You are related to your employer, as defined earlier under Standard Meal
    Allowance.

See the next section, How to Report, for a discussion of reimbursements,
nonaccountable plans, and adequate accounting.

Additional information. See Chapter 5 of Publication 463 for more information
on recordkeeping, including a discussion on how to prove each type of expense
discussed in this chapter.

How to Report

This section explains how to report on your tax return the expenses that are
discussed in this chapter. It discusses reimbursements, including treatment
of accountable and nonaccountable plans, adequate accounting, and per diem
allowances. This section ends by showing you how to complete Form 2106.

Self-employed. If you are self-employed, you must report your income and
expenses on Schedule C (Form 1040), or on Schedule F (Form 1040) if you are a
farmer. See Publication 535 and your form instructions for information on how
to complete your tax return.

Employees. If you are an employee, you must complete Form 2106 to deduct any
employee business expenses that exceed reimbursements. If you received no
reimbursement, you generally must complete Form 2106 to deduct the expenses
discussed in this chapter. See Completing Form 2106 later in this chapter.

Statutory employees. If you received a Form W─2 and the "Statutory employee"
box in box 6 was checked, you report your income and expenses related to that
income on Schedule C (Form 1040). Do not complete Form 2106. See your Form
1040 instructions for more information.

Statutory employees include full-time life insurance salespersons, certain
agent or commission drivers and traveling salespersons, and certain
homeworkers.

Unclaimed reimbursement. If you are entitled to a reimbursement from your
employer but you do not claim it, you cannot claim a deduction for the
expenses to which that reimbursement applies.

Reimbursement for personal expenses. If your employer reimburses you for
nondeductible personal expenses, such as for vacation trips, you must
report the reimbursement as wage income on your tax return. You cannot
deduct personal expenses.

Reimbursements

This section explains what to do when you receive an advance or are reimbursed
for any of the employee business expenses discussed in this chapter.

If you received an advance, allowance, or reimbursement for your expenses, how
you report this amount and your expenses depends on whether the reimbursement
was paid to you under an accountable plan or a nonaccountable plan.

This section explains the two types of plans, how per diem allowances
simplify proving the amount of your expenses, and the tax treatment of
your reimbursements and expenses.

A reimbursement or other expense allowance arrangement is a system or
plan that an employer uses to pay, substantiate, and recover the expenses,
advances, reimbursements, and amounts charged to the employer for employee
business expenses. It can also be a system used to keep track of amounts you
receive from your employer's agent or a third party. Arrangements include per
diem and mileage allowances. If a single payment includes both wages and an
expense reimbursement, the amount of the reimbursement must be specifically
identified.

Your employer has different options for reimbursing you for business-related
travel expenses:

1)  Reimbursing you for your actual expenses, as discussed throughout this
    chapter,

2)  Reimbursing you for business use of your car:

    a)  Based on your actual operating expenses, or

    b)  Using a car or mileage allowance as discussed in Chapter 6 of
        Publication 917,

3)  Using the meals only allowance, discussed later in this chapter, to
    reimburse your meals and incidental expenses and reimbursing you for
    your actual lodging expenses,

4)  Using the regular federal per diem rate (discussed later in this
    section),

5)  Using the high-low method (discussed later in this chapter), or

6)  Reimbursing you under any other method that is acceptable to the IRS.

Your employer should tell you what method of reimbursement is used and what
records your employer requires.

No reimbursement. If you are paid a salary or commission with the
understanding that you will pay your own expenses, you are not reimbursed
or given an allowance for your expenses. In this situation, you have no
reimbursement or allowance arrangement, and you deduct your expenses using
either Form 2106 and Schedule A (Form 1040), or only Schedule A (Form 1040)
if you are not required to file Form 2106. You do not have to read this section
on reimbursements. Instead, see Completing Form 2106, later in this chapter
for information on completing your tax return.

Accountable Plans

To be an accountable plan, your employer's reimbursement or allowance
arrangement must require you to meet all three of the following rules:

1)  Your expenses must have a business connection - that is, you must have
    paid or incurred deductible expenses while performing services as an
    employee of your employer,

2)  You must adequately account to your employer for these expenses within a
    reasonable period of time, and

3)  You must return any excess reimbursement or allowance within a reasonable
    period of time.

"Adequate accounting" and "reasonable period of time" are discussed later in
this chapter.

An excess reimbursement or allowance is any amount you are paid that is more
than the business-related expenses that you adequately accounted for to your
employer. See Returning Excess Reimbursements later in this chapter for
information on how to handle these excess amounts.

Employee meets accountable plan rules. If you meet the three rules for
accountable plans, your employer should not include any reimbursements in your
income in box 10 of your Form W─2. If your expenses equal your reimbursement,
you do not complete Form 2106. You have no deduction since your expenses and
reimbursement are equal.

Employee does not meet accountable plan rules. You may be reimbursed under
your employer's accountable plan but only part of your expenses may meet all
three rules. If your expenses are reimbursed under an otherwise accountable
plan but you do not return, within a reasonable period of time, any
reimbursement of expenses for which you did not adequately account, then only
the amount for which you did adequately account is considered as paid under an
accountable plan. The remaining expenses are treated as having been reimbursed
under a nonaccountable plan (discussed later in this chapter). If you received
an allowance or advance that was higher than the federal rate, see Returning
Excess Reimbursements, later.

Reasonable period of time. The definition of "reasonable period of time"
depends on the facts of your situation. The IRS will consider it reasonable
for you to:

1)  Receive an advance within 30 days of when you have an expense,

2)  Adequately account for your expenses within 60 days after they were paid
    or incurred, and

3)  Return any excess reimbursement within 120 days after the expense was
    paid or incurred.

If you are given a periodic statement (at least quarterly) that asks you to
either return or adequately account for outstanding reimbursements and you
comply within 120 days of the statement, the IRS will consider the amount
adequately accounted for or returned within a reasonable period of time.

Reimbursement of nondeductible expenses. You may be reimbursed under your
employer's accountable plan for expenses related to that employer's business,
some of which are deductible as employee business expenses and some of which
are not deductible. The reimbursements you receive for the nondeductible
expenses are treated as paid under a nonaccountable plan.

Example. Your employer's plan may reimburse you for travel expenses you
incurred while away from home on business, and for meal expenses you paid when
you work late at the office, even though you are not away from home. The part
of the arrangement that reimburses you for the nondeductible meals while you
work late at the office is treated as a second arrangement. The payments under
this arrangement are treated as paid under a nonaccountable plan.

Per diem allowances. If you are reimbursed by a per diem allowance (daily
amount) that you received under an accountable plan, two facts affect your
reporting:

1)  The federal rate for the area where you traveled, and

2)  Whether the allowance or your actual expenses were more than the federal
    rate.

For this purpose, the federal rate can be figured by using any one of three
methods:

1)  The regular federal per diem rate (discussed later in this chapter),

2)  The high-low method (discussed later in this chapter), or

3)  The standard meal allowance (discussed earlier under Travel Expenses).

The following discussions explain where to report your expenses depending upon
how the amount of your per diem allowance compares to the federal rate.

Per diem allowance LESS than or EQUAL to the federal rate. If your per diem
allowance is less than or equal to the federal rate, the allowance will not be
included in boxes 10, 12, and 14 of your Form W─2. You do not need to report
the related expenses or the per diem allowance on your return if your expenses
are equal to or less than the allowance.

However, if your actual expenses are more than the per diem allowance, you can
complete Form 2106 and deduct your excess expenses on Schedule A (Form 1040).
In this case, you must be prepared to prove to the IRS the total amount of
your expenses and reimbursements for the entire year.

Example 1. Jeremy takes a 2─day business trip to Atlanta. The federal rate in
Atlanta is $112 per day. As required by his employer's accountable plan, he
accounts for the time (dates), place, and business purpose of the trip. His
employer reimburses him $112 a day ($224 total) for living expenses. Jeremy's
living expenses in Atlanta are not more than $112 a day.

Jeremy's employer does not include any of the reimbursement on his Form W─2.
Jeremy does not deduct the expenses on his return.

Example 2. The facts in Matt's case are the same as those in Example 1 above.
However, Matt's employer uses the high-low method (discussed later in this
chapter) to reimburse employees. Since Atlanta is a high-cost area, Matt is
given an advance of $130 a day ($260 total) for his lodging, meals, and
incidental expenses. Matt's actual expenses totaled $300.

Matt is reimbursed under an accountable plan. However, since his $300 of
expenses exceed his $260 advance, Matt itemizes his deductions on Schedule A
of Form 1040 in order to claim the excess expenses. Matt completes Form 2106
(showing all of his expenses and reimbursements) and enters $40 [$300 - ($130
a day * 2)] on line 19 of Schedule A.

Per diem allowance MORE than the federal rate. If your allowance is more than
the federal rate, your employer is required to include the allowance amount
up to the federal rate in box 17 (code L) of your Form W─2. This amount is not
taxable. However, the per diem allowance in excess of the federal rate will
be included in box 10 (and in boxes 12 and 14 if applicable) of your Form W─2.
You must report this part of your reimbursement as if it were wage income. The
IRS does not require you to return it to your employer. However, see Returning
Excess Reimbursements, later.

If your actual expenses are less than or equal to the federal rate, you do not
complete Form 2106 or claim any of your expenses on your return.

However, if your actual expenses are more than the federal rate, you
can complete Form 2106 and deduct those expenses that are more than the
federal rate on Schedule A (Form 1040). You must report on Form 2106 your
reimbursements up to the federal rate as shown in box 17 of your Form W─2
and all your expenses. You should be prepared to prove these amounts to
the IRS.

Example 1. Laura lives and works in Austin. Her employer sent her to Dallas
for 2 days on business. Laura's employer paid the hotel directly for her
lodging and reimbursed Laura $40 a day ($80 total) for meals and incidental
expenses. Laura's actual meal expenses did not exceed the federal rate for
Dallas which is $34 per day.

Her employer included the $12 excess over the federal rate [($40 * 2) - ($34 *
2)] in boxes 10, 12, and 14 of Laura's Form W─2. Her employer shows $68 ($34
a day * 2) in box 17 of her Form W─2. This amount is not included in Laura's
income. Laura does not have to complete Form 2106; however, she must include
the $12 excess in her gross income as wages (by reporting the total amount
shown in box 10 of her Form W─2). The IRS does not require Laura to return
the $12 to her employer.

Example 2. Joe also lives in Austin and works for the same employer as Laura.
The employer sent Joe to Washington, D.C. and paid the hotel directly for his
hotel bill. The employer reimbursed Joe $40 a day for his meals and incidental
expenses. The federal rate for Washington, D.C. is $34 a day.

Joe can prove that his actual meal expenses were $100. His employer's
accountable plan will not pay more than $40 a day for travel to Washington,
D.C., so Joe does not give his employer the records that prove that he
actually spent $100. However, he does account for the time, place, and
business purpose of the trip. This is Joe's only business trip in 1992.

Joe was reimbursed $80 ($40 * 2 days), which is $12 more than the federal rate
of $68 ($34 * 2 days). The employer includes the $12 as income on Joe's Form
W─2 in boxes 10, 12, and 14. The employer also enters $68 in box 17 of Joe's
Form W─2, along with a code L.

Joe completes Form 2106 to figure his deductible expenses. He enters the
total of his actual expenses for the year ($100) on Form 2106. He also enters
the reimbursements which were not included in his income ($68). His total
deductible expense, before the 80% limit, is $32. After he figures the
80% limit on his unreimbursed meals and entertainment, he will enter the
difference on line 19 of Schedule A (Form 1040).

Car or mileage allowances. How you report a car or mileage allowance that you
received under an accountable plan depends on whether the reimbursement or
your actual expenses were more than the standard mileage rate of 28 cents a
mile for 1992. The standard mileage rate is considered to be the federal rate.
If your allowance was equal to or less than 28 cents a mile, see Per diem
allowance LESS than or EQUAL to the federal rate, earlier. If your allowance
was more than 28 cents a mile, see Per diem allowance MORE than the federal
rate, earlier.

Example 1. Nicole drives 10,000 miles a year for business. As required by her
employer's accountable plan, she accounts for the time (dates), place, and
business purpose of each trip. Her employer pays her a mileage allowance of
28 cents a mile. Nicole's expenses of operating her car do not exceed 28
cents a mile.

Nicole's employer does not include any of the reimbursement on her Form W─2.
Also, Nicole has no deduction for car expenses.

Example 2. The facts are the same as in Example 1, except Nicole gets
reimbursed 35 cents a mile, which is 7 cents a mile more than the standard
mileage rate. Her employer must include the reimbursement amount up to the
standard mileage rate, $2,800 (10,000 miles * 28 cents) in box 17 (code L)
of her Form W─2. That amount is not taxable.

Nicole's employer must also include $700 (10,000 miles * 7 cents) in
box 10 (and boxes 12 and 14, if applicable) of her Form W─2. This is the
reimbursement in excess of the standard mileage rate. Nicole must include
the $700 in her wage income. Because her reimbursement is equal to or more
than her expenses, Nicole does not complete Form 2106.

Employee bound by employer's plan. The employer makes the decision whether to
reimburse employees under an accountable plan or a nonaccountable plan. If you
are an employee who receives payments under a nonaccountable plan, you cannot
convert these amounts to payments under an accountable plan by voluntarily
accounting to your employer for the expenses and voluntarily returning excess
reimbursements to the employer.

Adequate Accounting

One of the three rules listed earlier, under Accountable Plans, for a
reimbursement or other expense allowance arrangement to qualify as an
accountable plan was that you adequately account to your employer for your
expenses. You adequately account by giving your employer documentary evidence
of your mileage, travel, and other employee business expenses, along with a
statement of expense, an account book, a diary, or a similar record in which
you entered each expense at or near the time you had it. Documentary evidence
includes receipts, canceled checks, and bills. See Recordkeeping, earlier,
for a discussion of the aspects or elements of each expense that you must prove.

You must account for all amounts received from your employer during the year
as advances, reimbursements, or allowances for business use of your car,
travel, entertainment, gifts, or any other expenses. This includes amounts
that were charged to your employer by credit card or other method. You must
give your employer the same type of records and supporting information that
you would be required to give to the IRS if the IRS questioned a deduction on
your return. You must pay back the amount of any reimbursement or other
expense allowance for which you do not adequately account or that exceeds
the amount for which you accounted.

Per diem allowance or reimbursement. You may be able to prove the amount of
your travel expenses by using a per diem allowance amount. If your employer
reimburses you for your lodging, meal, and incidental expenses at a fixed
amount per day of business travel, that amount is called a per diem allowance.

The term "incidental expenses" includes, but is not limited to, laundry
expenses, cleaning and pressing expenses, and fees and tips for persons
who provide services, such as food servers and luggage handlers. Incidental
expenses do not include taxicab fares or the costs of telegrams or telephone
calls.

A per diem allowance satisfies the adequate accounting requirements for the
amount in question if:

1)  Your employer reasonably limits payments of the travel expenses to those
    that are ordinary and necessary in the conduct of the trade or business,

2)  The allowance is similar in form to and not more than the federal per
    diem (that is, your allowance varies based on how long you were
    traveling),

3)  You are not related to your employer (as defined under Standard Meal
    Allowance, earlier), and

4)  The time, place, and business purpose of the travel are proved, as
    explained earlier under Recordkeeping.

If the IRS finds that an employer's travel allowance practices are not based
on reasonably accurate estimates of travel costs, including recognition of
cost differences in different areas, you will not be considered to have
accounted to your employer, and you may be required to prove your expenses
to the IRS.

These rules also apply if you are reimbursed only for your meal expenses or
get a separate per diem allowance for meals and incidental expenses that
is not more than the standard meal allowance. A per diem allowance is paid
separately for meals and incidental expenses if your employer furnishes
lodging in kind, pays you a meal allowance plus the actual cost of your
lodging, or pays the hotel, motel, etc. directly for your lodging. A per diem
allowance is also paid separately for meals and incidental expenses if your
employer does not have a reasonable belief that you incurred lodging expenses,
such as when you stay with friends or relatives or sleep in the cab of your
truck.

Proving your expenses with a per diem allowance. If your employer pays for
your expenses using a per diem allowance, including a meals only allowance,
you can generally use the allowance as proof for the amount of your expenses.
However, the amount of expense that can be proven this way cannot be more
than the regular federal per diem rate or the high-low method, both discussed
below.

The per diem allowance can only be used as proof of the cost of meals and/or
lodging under the adequate accounting requirements. You must still provide
other proof of the time, place, and business purpose for each expense.

Regular federal per diem rate. The regular federal per diem rate is the
highest amount that 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. You must use the rate in effect for the
area where you stop for sleep or rest. Your employer should have these rates
available. (Employers can get Publication 1542, which gives the rates in the
continental United States for the current year.)

The federal rates for meals and incidental expenses are the same as those
rates discussed earlier under Standard Meal Allowance.

High-low method. This is a simplified method of computing the federal per diem
rate for travel within the continental United States. Called the "high-low
method," it eliminates the need to keep a current list of the per diem rate
in effect for each city in the continental United States.

Under the high-low method, the per diem amount is $130 for certain locations.
All other areas have a per diem amount of $88. The areas eligible for the $130
per diem amount under the high-low method are listed in the Locations Eligible
for $130 Per Diem Amount chart, shown on this page.

                 Locations Eligible for $130 Per Diem Amount

       City                           County (1)
       California
       Death Valley                    Inyo
       Los Angeles                     Los Angeles, Kern,
                                       Orange, Ventura;
                                       Edwards AFB, China
                                       Lake Naval Center
       San Diego                       San Diego
       San Francisco                   San Francisco
       Santa Barbara                   Santa Barbara

       Colorado
       Aspen                           Pitkin
       Vail                            Eagle

       District of Columbia
       Washington, DC                  Virginia counties of
                                       Arlington, Loudoun, and
                                       Fairfax and cities
                                       Alexandria, Falls Church,
                                       and Fairfax. Maryland
                                       counties of Montgomery
                                       and Prince George's

       Florida
       Key West                        Monroe

       Georgia
       Atlanta                         Clayton, De Kalb,
                                       Cobb, Fulton

       Illinois
       Chicago                         Cook, Lake, Du Page

       Maryland (see also District of Columbia)
       Annapolis                       Anne Arundel
       Baltimore                       Baltimore, Harford
       Columbia                        Howard
       Ocean City                      Worcester

       Massachusetts
       Andover                         Essex
       Boston, Lowell                  Middlesex, Norfolk
       Quincy                          Suffolk

       Michigan
       Detroit                         Wayne

       New Jersey
       Atlantic City                   Atlantic
       Newark                          Bergen, Essex, Hudson,
                                       Passaic, Union
       Ocean City/Cape May             Cape May
       Princeton/Trenton               Mercer

       New York
       New York City                   Bronx, Brooklyn, Manhattan,
                                       Staten Island, Queens;
                                       Nassau, Suffolk
       White Plains                    Westchester

       Pennsylvania
       Philadelphia                    Philadelphia

       Rhode Island
       Newport                         Newport

       South Carolina
       Hilton Head                     Beaufort

       Virginia (see also District of Columbia)

     (1)Includes parishes, boroughs, military installations, etc.

Allocation of per diem on partial days of travel. The federal per diem rate or
the federal meal and incidental expenses (also known as "M&IE") rate is for a
full 24─hour day of travel. If you travel for part of a day, the full day rate
must be allocated. You can use either of the following methods to figure the
federal per diem rate for that day.

1)  Count one-fourth of the federal rate for each 6─hour quarter of the
    day during any portion of which you are traveling away from home for
    business. The 6─hour quarters are midnight to 6 a.m.; 6 a.m. to noon;
    noon to 6 p.m.; and 6 p.m. to midnight.

2)  Prorate the federal rate using any method which is consistently applied
    and is in accordance with reasonable business practice. For example, an
    employer can treat 2 full days of per diem paid for travel away from home
    from 9 a.m. of one day to 5 p.m. of the next day as being no more than
    the federal rate even though a federal employee would be limited to a
    reimbursement for only 1-1/2 days.

These rules apply whether your employer uses the regular federal per diem rate
or the high-low method.

Car or mileage allowance. A car or mileage allowance satisfies the adequate
accounting requirements for the amount if:

1)  Your employer reasonably limits payments of the transportation expenses
    to those that are ordinary and necessary in the conduct of the trade or
    business,

2)  The allowance is paid at the standard mileage rate, at another rate per
    mile, or other acceptable method, and

3)  You prove the time, place, and business purpose of the travel to your
    employer within a reasonable period of time.

If your employer reimburses your expenses using a car or mileage allowance,
you can generally use the allowance as proof for the amount of your expenses.
However, the amount of expense that can be proven this way cannot be more
than the standard mileage rate or the amount of the fixed and variable rate
allowance that your employer does not include in boxes 10, 12, or 14 of your
Form W─2.

Only the amount will be considered proven under the adequate accounting
requirements. You must still prove the time, place, and business purpose
for each expense.

Returning Excess Reimbursements

Under an accountable plan, you must be required to return any excess
reimbursement for your travel expenses to the person paying the reimbursement.
Excess reimbursement means any amount for which you did not adequately account
within a reasonable period of time. For example, if you received a travel
advance and you did not spend all the money on business-related expenses, or
if you do not have proof of all your expenses, you have excess reimbursement.

"Adequate accounting" and "reasonable period of time" were discussed earlier
in this chapter.

Unproven or unspent per diem allowances. Your employer's reimbursement
arrangement is considered an accountable plan even if you do not return the
amount of an unspent per diem or mileage allowance to your employer as long
as you prove that you did travel that day. This is an accountable plan because
the amount (up to the amount computed under the regular per diem rate,
high-low method, or standard mileage rate) of the allowance is considered
proven. Your employer will include as income in boxes 10, 12, and 14 of your
Form W─2 the unspent or unproven amount of per diem allowance as excess
reimbursement. This unspent or unproven amount is considered paid under a
nonaccountable plan (discussed later in this section).

You must prove that you actually traveled, proving the elements described
earlier under Recordkeeping, on each day for which you received a per
diem or mileage allowance. To meet the requirements for returning excess
reimbursements, you must return the allowance you received for all days
that you did not prove were days of business travel.

Travel advance. If your employer provides you with an expense allowance before
you actually have the expense, and the allowance is reasonably calculated not
to exceed your expected expenses, you have received a travel advance. Under
an accountable plan, you must adequately account to your employer for this
advance and be required to return any excess within a reasonable period of
time. See Reasonable period of time, earlier in this chapter. If you do
not adequately account or do not return any excess reimbursement within a
reasonable period of time, the amount you do not account for or return will
be treated as having been paid under a nonaccountable plan (discussed later).

Per diem MORE than federal rate. If your employer's accountable plan pays you
a per diem or similar allowance, you must return advances for any day or part
of a day you did not travel. If your allowance or advance is higher than
the federal rate for the area you traveled to, you do not have to return the
difference between the two rates for the period you can prove business-related
travel expenses. However, the difference will be reported as wages on your
Form W─2.

Example. Your employer sends you a on 5─day business trip to Los Angeles and
gives you a $200 advance to cover your meals and incidental expenses. The
federal per diem for Los Angeles is $34. Your trip lasts only 3 days. You must
return the $80 ($40 * 2 days) advance for the 2 days you did not travel. You
do not have to return the $18 difference (($40 - $34) * 3 days) between the
two rates for the three days you did travel. However, the $18 will be reported
on your Form W─2 as wages.

Nonaccountable Plans

A nonaccountable plan is a reimbursement or expense allowance arrangement
that does not meet the three rules listed earlier under Accountable Plans.

In addition, the following payments made under an accountable plan will be
treated as being paid under a nonaccountable plan:

1)  Excess reimbursements you fail to return to your employer, and

2)  Reimbursements of nondeductible expenses related to your employer's
    business. See Reimbursement of nondeductible expenses earlier under
    Accountable Plans.

If you are not sure if the reimbursement or expense allowance arrangement
is an accountable or nonaccountable plan, see your employer.

Your employer will combine the amount of any reimbursement or other expense
allowance paid to you under a nonaccountable plan with your wages, salary,
or other compensation and report the total in box 10 (and boxes 12 and 14
if applicable) of your Form W─2.

You must complete Form 2106 and itemize your deductions on Schedule A
(Form 1040) to deduct your expenses for travel, transportation, meals, or
entertainment. Your meal and entertainment expenses will be subject to the
80% limit discussed earlier under Entertainment Expenses. Also, your total
expenses will be subject to the 2% of adjusted gross income limit which
applies to most miscellaneous itemized deductions. This 2% limit is figured
on Schedule A of Form 1040.

Example. Kim's employer gives her $500 a month, $6,000 total, for her business
expenses. Her employer does not require Kim to provide any proof of her
expenses, and Kim can keep any funds that she does not spend.

Kim is being reimbursed under a nonaccountable plan. Her employer will include
the $6,000 on Kim's Form W─2 as if it were wages. If Kim wants to deduct her
business expenses, she must complete Form 2106 and itemize her deductions on
Schedule A of Form 1040. The 80% limit applies to her meal and entertainment
expenses, and the 2% of adjusted gross income limit applies to her total
employee business expenses.

Part of reimbursement paid under accountable plan. If your expenses are
reimbursed under an otherwise accountable plan but you do not return, within
a reasonable period of time, any reimbursement for which you do not adequately
account, only the amount for which you do not adequately account is considered
as paid under a nonaccountable plan. The remainder is treated as having been
paid under an accountable plan (as discussed earlier in this chapter).

Completing Form 2106

This section briefly describes for employees how to complete Form 2106. The
chart Reporting Employee Business Expenses and Reimbursements, shown on this
page, explains what the employer reports on Form W─2 and what the employee
reports on Form 2106. The Instructions for Form 2106 have more information
on completing the form.

Vehicle expenses. If you used a vehicle to perform your job as an employee,
you may be able to deduct certain vehicle expenses. Vehicle expenses are
generally figured on Part II on Form 2106, and then claimed on line 1, column
A, of Part I of Form 2106.

Local transportation expenses. Show your local business transportation
expenses that did not involve overnight travel on line 2, Column A, of Form
2106. Also include on this line business expenses you have for parking fees
and tolls. Do not include expenses of operating your car or expenses of
commuting between your home and work.

Employee business expenses other than meals and entertainment. Show your other
employee business expenses on lines 3 and 4, column A, of Form 2106. Do not
include expenses for meals and entertainment in these expenses. Line 4 is for
such expenses as business gifts, educational expenses (tuition and books),
office-in-the-home expenses, and trade and professional publications. For
information on educational expenses that you may be able to deduct, see
Chapter 29.

Meal and entertainment expenses. Show the full amount of your expenses for
business-related meals and entertainment on line 5, column B, of Form 2106.
Include meals you paid for while away from your tax home overnight and other
business meals and entertainment. Your meal and entertainment expenses that
are subject to the 80% limit are computed in column B of Form 2106.

Reimbursements. Enter on line 7 of Form 2106 the amounts your employer (or
third party) reimbursed you for employee business expenses that were not
included in box 10 of your Form W─2. This includes any reimbursement
reported under code "L" in box 17 of Form W─2.

Allocating your reimbursement. If you were reimbursed under an accountable
plan and want to deduct excess expenses that were not reimbursed, you may
have to allocate your reimbursement. If your employer paid you a single amount
which covers meals or entertainment, as well as other business expenses, you
must allocate the reimbursement so that you know how much to enter in column
A and Column B of line 7 of Form 2106.

Use the following worksheet to allocate your reimbursement.

       1. Enter the total amount of the
          reimbursements your employer gave
          you that were not reported to you
          in box 10 of your Form W─2 .................
                                                        __________
       2. Enter the total amount of your expenses
          for the periods covered by this
          reimbursement ..............................
                                                        __________
       3. Of the amount on line 2, enter the part of
          your total expense for meals and
          entertainment ..............................
                                                        __________
       4. Divide line 3 by line 2. Enter the result
          as a decimal (to at least two places) ......
                                                        __________
       5. Multiply line 1 by line 4. Enter the result
          here and in Column B, line 7 ...............
                                                        __________
       6. Subtract line 5 from line 1. Enter the
          result here and in Column A, line 7 ........
                                                        __________

Example. Assume your employer paid you an expense allowance of $5,000 during
1992 under an accountable plan. You actually spent $6,500 during the year
($2,000 for meals and $4,500 for automobile expenses). First, divide your meal
expenses by your total expenses ($2,000 ÷ $6,500). The result is .31. Multiply
your reimbursement by this decimal ($5,000 * .31). The result is $1,550 (the
amount of reimbursement attributable to your meals). Enter this amount on line
7, Column B of Form 2106. Enter the remainder of the reimbursement, $3,450
($5,000 - $1,550), on line 7, Column A of Form 2106.

Schedule A (Form 1040). After you have completed your Form 2106, follow the
directions on that form to deduct your expenses on the appropriate line of
your tax return. For most taxpayers this is on line 19 of Schedule A. However,
if you are a performing artist or a disabled employee with impairment-related
work expenses, see Special Rules later in this chapter.

Limits on employee business expenses. Your employee business expenses may be
subject to any of the three limits described below. These limits are figured
in the following order on the form specified.

1. Limit on meals and entertainment. Certain meal and entertainment expenses
are subject to an 80% limit. Employees figure this limit on line 9 of Form
2106. See 80% Limit, earlier in this chapter.

2. Limit on employee business expenses. Employees deduct employee business
expenses (as figured on Form 2106) on line 19 of Schedule A (Form 1040). Most
miscellaneous itemized deductions, including employee business expenses, are
subject to a 2% of adjusted gross income limit. This limit is figured on line
23 of Schedule A.

3. Limit on total itemized deductions. If your adjusted gross income (line
32 of Form 1040) is more than $105,250 ($52,625 if you are married filing
separately), the amount of your overall itemized deductions, including
employee business expenses, may be limited. See Chapter 21 for more
information on this limit.

Special Rules

This section discusses special rules that apply only to performing artists and
disabled employees with impairment-related work expenses.

Expenses of certain performing artists. If you are a performing artist, you
may qualify to deduct your employee business expenses as an adjustment to
gross income rather than as a miscellaneous itemized deduction. To qualify,
you must meet all of the following requirements.

1)  During the tax year, you must perform services in the performing arts
    for at least two employers.

2)  You must receive at least $200 each from any two of these employers.

3)  Your related performing-art business expenses must exceed 10% of your
    gross income from the performance of such services.

4)  Your adjusted gross income cannot be more than $16,000 before deducting
    these business expenses.

5)  If you are married, you must file a joint return unless you lived apart
    from your spouse at all times during the tax year.

6)  If you file a joint return, you must figure requirements (1), (2), and
    (3) separately for both you and your spouse. However, requirement (4)
    applies to you and your spouse's combined adjusted gross income.

If you meet all of the above requirements, you should first complete Form
2106.

Then you include your performing-arts related expenses from line 11 of Form
2106 in the total on line 30 of Form 1040. Write "QPA" and the amount of your
performing-art related expenses in the space to the left of line 30 of Form
1040.

If you do not meet all of the above requirements, you do not qualify to deduct
your expenses as an adjustment to gross income. Instead, you must complete
Form 2106 and deduct your employee business expenses on line 19 of Schedule
A (Form 1040).

Expenses of disabled employees. If you are an employee with a physical or
mental disability, your impairment-related work expenses are not subject to
the 2% of adjusted gross income limit that applies to most other employee
business expenses. You must complete Form 2106; however, you enter your
impairment-related work expenses from line 11 of Form 2106 on line 25 of
Schedule A (Form 1040). Enter your employee business expenses unrelated to
your disability from line 11 of Form 2106 on line 19 of Schedule A.

Impairment-related work expenses are your allowable expenses for attendant
care at your workplace and other expenses you have in connection with your
workplace that you incur to allow you to work. For more information, see
Publication 907, Tax Information for Persons with Handicaps or Disabilities.