US Internal Revenue Service: p463--1997

8/14/2019 US Internal Revenue Service: p463--1997

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ContentsIntroduction ........................................ 2

1.Travel Expenses .......................... 2Tax Home ....................................... 3

Temporary Assignment or Job .. 3What Are Travel Expenses? ........... 4

Deductible Travel Expenses ..... 4Standard Meal Allowance ......... 5Travel in the United States ....... 6

Travel Outside the United States 6Luxury Water Travel .................. 8Conventions ............................... 8

2.Entertainment Expenses ............ 9What Entertainment Expenses Are

Deductible? .............................. 9Directly-Related Test ................. 10Associated Test ......................... 1150% Limit ................................... 11

3.Business Gift Expenses ............. 12

4.Local Transportation Expenses 13

Car Expenses ................................. 14Standard Mileage Rate ............. 14Actual Car Expenses ................. 15Disposition of a Car ................... 21Leasing a Car ............................ 21

5.Recordkeeping ............................ 22How To Prove Expenses ................ 22

How Long To Keep Records andReceipts .............................. 24

6.How To Report ............................ 24Where To Report ............................ 24

Vehicle Provided by YourEmployer ............................ 25

Reimbursements ............................. 25Accountable Plans ..................... 25Nonaccountable Plans .............. 28Rules for Independent

Contractors ......................... 28Completing Forms 2106 and

2106EZ .................................. 29Special Rules ............................ 30Illustrated Examples .................. 31

7.How To Get More Information ... 37

Appendices ......................................... 37

Appendix A ......................................... 38(Standard Meal Allowance Amounts)

Appendix B ......................................... 41(Inclusion Amounts for Leased Cars)

Index .................................................... 48

Important Changesfor 1997Increase in standard meal allowance. Thestandard meal allowance for most areas inthe United States has increased to $30. Useof the standard meal allowance is explainedin chapter 1.

Standard meal allowance for travel daysyou depart and return. When you travelaway from home, you can claim 3/4 of thestandard meal allowance for the days you

Departmentof theTreasury

InternalRevenueService

Publication 463Cat. No. 11081L

Travel,Entertainment,Gift, and CarExpenses

For use in preparing

1997 Returns

Get f orms and other informat ion faster and easier by:COMPUTER

World Wide Web www.irs.ustreas.gov FTP ftp.irs.ustreas.gov IRIS at FedWorld (703) 321-8020

FAX From your FAX machine, dial (703) 368-9694See How To Get More Information in this publication.


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depart and return. See Travel for days youdepart and return under Standard Meal Al-lowancein chapter 1 for more information.

Increase in standard mileage rate. Thestandard mileage rate for the cost of operat-ing your car in 1997 is 311/2 cents a mile forall business miles. Use of the standard mile-age rate is explained in chapter 4.

Depreciation limits on business cars.Generally, the total section 179 and depreci-

ation deductions you can take on a car thatyou use in your business and first place inservice in 1997 is $3,160. Your depreciationcannot exceed $5,000 for the second year ofrecovery, $3,050 for the third year of recov-ery, and $1,775 for each later tax year. De-preciation on cars and the section 179 de-duction are covered in chapter 4.

Exceptions for clean-fuel cars. Thereare two exceptions to the depreciation limits.They are effective after August 5, 1997, forcars that run on clean fuel. See Exceptionsfor clean-fuel carsunder Depreciation Limitsin chapter 4.

Federal crime investigations. Certain fed-eral employees who are participating in fed-

eral crime investigations are not subject to the1year rule for deducting temporary travelexpenses. See Exception for federal crimeinvestigations under Temporary Assignmentor Jobin chapter 1.

Officials paid on a fee basis. Certain fee-basis officials can claim their employee busi-ness expenses whether or not they itemizetheir other deductions on Schedule A (Form1040). See Special Rulesin chapter 6.

Important Reminder

Limits that apply to employee deductions.If you are an employee, deduct your work-related expenses discussed in this publicationas a miscellaneous itemized deduction onSchedule A (Form 1040). Generally, theamount you can deduct is limited to theamount that exceeds 2% of your adjustedgross income. It may be further limited if youradjusted gross income is more than $121,200($60,600 if you are married filing separately).How to report your expenses is covered inchapter 6.

Introduction

You may be able to deduct business-relatedexpenses you have for:

Travel away from home,

Entertainment,

Gifts, or

Local transportation.

Your expenses for travel away from homeand for local transportation may include carexpenses. This publication explains what ex-penses are deductible, how to report them onyour return, what records you need to proveyour expenses, and how to treat any expensereimbursements you may receive.

Who should use this publication. Thispublication deals with expenses of employeesand sole proprietors. Other businesses (suchas partnerships, corporations, and trusts) andemployers who reimburse their employees forbusiness expenses should refer to their taxform instructions and chapter 16 of Publica-tion 535, Business Expenses, for informationon deducting travel, entertainment, gift, andtransportation expenses.

Volunteers. If you perform services as avolunteer worker, you may be able to deductsome of your costs as a charitable contribu-tion. See Out-of-Pocket Expenses in GivingServices in Publication 526, Charitable Con-tributions, for information on the expensesyou can deduct.

Expenses fully reimbursed. You will notneed to read this publication if all of the fol-lowing are true.

1) You fully accounted to your employer foryour work-related expenses.

2) You received full reimbursement for yourexpenses.

3) Your employer required you to return anyexcess reimbursement and you did so.

4) Box 13 of your Form W2 shows no

amount with a code L.

If you meet these four conditions, there is noneed to show the expenses or the re-imbursements on your return. If you wouldlike more information on reimbursements andaccounting to your employer, see chapter 6.

If you do not meet all of these conditions,you must complete Form 2106 or Form2106EZ and itemize your deductions toclaim your expenses. See chapter 6.

TIP

If you meet these conditions and youremployer included reimbursementson your Form W2 in error, ask your

employer for a corrected Form W2.

Vehicle provided by employer. If anemployer-provided vehicle was available foryour use, you received a fringe benefit. Gen-erally, your employer must include the valueof the use or availability in your income aspay. However, there are exceptions if the useof the vehicle qualifies as a working conditionfringe benefit (such as the use of a qualifiednonpersonal use vehicle). Employers shouldsee chapter 4 of Publication 535, BusinessExpenses, for information on fringe benefits.

A working condition fringe is any prop-erty or service provided to you by your em-ployer that you could deduct as an employeebusiness expense if you had paid for it. Aqualified nonpersonal use vehicle is onethat is not likely to be used more than mini-mally for personal purposes because of its

design.For information on how to report your car

expenses that your employer did not provideor reimburse you for (such as when you payfor gas and maintenance for a car your em-ployer provides), see Vehicle Provided byYour Employerin chapter 6.

Useful ItemsYou may want to see:

Publication

225 Farmer's Tax Guide

529 Miscellaneous Deductions

535 Business Expenses

1542 Per Diem Rates

Form (and Instructions)

1040 U.S. Individual Income Tax Return

Schedule A (Form 1040 Itemized De-ductions

Schedule C (Form 1040) Profit or LossFrom Business

Schedule CEZ (Form 1040) Net ProfitFrom Business

Schedule F (Form 1040) Profit or LossFrom Farming

2106 Employee Business Expenses

2106EZ Unreimbursed Employee Busi-ness Expenses

4562 Depreciation and Amortization

See chapter 7, How To Get More Infor-mation, for information about getting thesepublications and forms.

1.

Trave l ExpensesIf you temporarily travel away from your

tax home, you can use this chapter to deter-mine if you have deductible travel expenses.This chapter defines tax home,temporary, and different types of travel ex-penses, including the standard meal allow-ance. It also discusses the rules for travel in-side and outside the United States, luxurywater travel, and deductible convention ex-penses.

Travel expenses defined. For tax purposes,travel expenses are the ordinary and neces-sary expenses of traveling away from homefor your business, profession, or job. An or-dinary expense is one that is common andaccepted in your field of business, trade, orprofession. A necessary expense is one thatis helpful and appropriate to your business.An expense does not have to be indispensa-ble to be considered necessary. However,you cannot deduct expenses to the extentthey are lavish or extravagant.

You will find examples of deductible travelexpenses in Table 1.

Traveling away from home. You are trav-

eling away from home if:

1) Your duties require you to be away fromthe general area of your tax home (de-fined later) substantially longer than anordinary day's work, and

2) You need to get sleep or rest to meet thedemands of your work while away fromhome.

This rest requirement is not satisfied bymerely napping in your car. You do not haveto be away from your tax home for a wholeday or from dusk to dawn as long as yourrelief from duty is long enough to get neces-sary sleep or rest.

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Example 1. You are a railroad conductor.You leave your home terminal on a regularlyscheduled round-trip run between two citiesand return home 16 hours later. During therun, you have 6 hours off at your turnaroundpoint where you eat two meals and rent ahotel room to get necessary sleep beforestarting the return trip. You are considered tobe away from home, and you can deducttravel expenses.

Example 2. You are a truck driver. Youleave your terminal and return to it later the

same day. You get an hour off at your turn-around point to eat. Because you are not offto get necessary sleep and the brief time offis not an adequate rest period, your trip is notconsidered as travel away from home. Youcannot deduct travel expenses.

Tax HomeTo deduct travel expenses, you must firstdetermine the location of your tax home.

Generally, your tax home is your regularplace of business or post of duty, regardlessof where you maintain your family home. Itincludes the entire city or general area in

which your business or work is located. If youhave more than one regular place of busi-ness, your tax home is your main place ofbusiness. If you do not have a regular or amain place of business because of the natureof your work, then your tax home may be theplace where you regularly live. See No mainplace of business or work, later.

If you do not have a regular place ofbusiness or post of duty and there is no placewhere you regularly live, you are considereda transient (an itinerant) and your tax homeis wherever you work. As a transient, youcannot claim a travel expense deduction be-cause you are never considered away fromhome.

Main place of business or work. If youhave more than one place of work, you shoulduse the following factors to determine yourmain place of business or work:

1) The total time you ordinarily spendworking in each area,

2) The degree of your business activity ineach area, and

3) The relative amount of your income fromeach area.

Example. You live in Cincinnati whereyou have a seasonal job for 8 months andearn $25,000. You work the remaining 4months in Miami, also at a seasonal job, andearn $9,000. Cincinnati is your main place of

work because you spend most of your timethere and earn most of your income there.

No main place of business or work. Youmay have a tax home even if you do not havea regular or main place of work. Your taxhome may be the home where you regularlylive.

Factors used to determine tax home.If you do not have a regular or main place ofbusiness or work, use the following threefactors to see if you have a tax home.

1) You have part of your business in thearea of your main home and use thathome for lodging while doing businessthere.

2) You have living expenses at your mainhome that you duplicate because yourbusiness requires you to be away fromthat home.

3) You have not left the area in which bothyour traditional place of lodging and yourmain home are located; you have amember or members of your family livingat your main home; or you often use thathome for lodging.

If you meet all three factors, your tax home

is the home where you regularly live, and youmay be able to deduct travel expenses. If youmeet only two of the factors, you may havea tax home depending on all the facts andcircumstances. If you meet only one factor,you are a transient; each place you work be-comes your tax home and you cannot deducttravel expenses.

Example 1. You are single and live inBoston in an apartment you rent. You haveworked for your employer in Boston for anumber of years. Your employer enrolls youin a 12-month executive training program.You do not expect to return to work in Bostonafter you complete your training.

During your training, you do not do anywork in Boston. Instead, you receive class-room and on-the-job training throughout theUnited States. You keep your apartment inBoston and return to it frequently. You useyour apartment to conduct your personalbusiness. You also keep up your communitycontacts in Boston. When you complete yourtraining, you are transferred to Los Angeles.

You have not satisfied factor (1) becauseyou did not work in Boston. You have satisfiedfactor (2) because you have duplicate livingexpenses. You also satisfy factor (3) becauseyou do not abandon your apartment in Bostonas your traditional home, you keep yourcommunity contacts, and you frequently re-turn to live in your apartment. You have a taxhome in Boston for travel expense deductionpurposes.

Example 2. You are an outsidesalesperson with a sales territory coveringseveral states. Your employer's main office isin Newark, but you do not conduct any busi-ness there. Your work assignments are tem-porary, and you have no way of knowingwhere your future assignments will be lo-cated. You have a room in your married sis-ter's house in Dayton. You stay there for oneor two weekends a year, but you do no workin the area. You do not pay your sister for theuse of the room.

You have not met any of the three factorslisted earlier. You are a transient and haveno tax home. Because you are never awayfrom home, you cannot deduct the cost ofyour meals and lodging as travel expenses.

Transient workers. If you move from jobto job, maintain no fixed home, and are notassociated with any particular business lo-cality, each place you work becomes yourmain place of business and your tax home.You cannot deduct your expenses for mealsand lodging.

Living away from your tax home. If you(and your family) live in an area outside yourtax home (main place of work), you cannotdeduct travel expenses between your taxhome and your family home. You also cannotdeduct the cost of meals and lodging whileat your tax home. See Example 1 that follows.

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

Example 1. You are a truck driver andyou and your family live in Tucson. You areemployed by a trucking firm that has its ter-minal in Phoenix. At the end of your long runs,you return to your home terminal in Phoenixand spend one night there before returninghome. You cannot deduct any of your travelcosts in Phoenix because Phoenix is your tax

home.

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

Because you spend most of your workingtime and earn most of your salary inBaltimore, that city is your tax home. Youcannot deduct any expenses you have formeals and lodging there. However, when youreturn to work in Pittsburgh, you are awayfrom your tax home even though you stay atyour family home. You can deduct the cost

of your round trip between Baltimore andPittsburgh. You can also deduct your part ofyour family's living expenses for meals andlodging while you are living and working inPittsburgh.

Temporary Assignmentor JobYou may regularly work or carry on yourbusiness activities within the city or generalarea of your tax home and also work or con-duct business at another location. It may notbe practical to return home from this otherlocation at the end of each day's work.

If your assignment or job away from yourmain place of work is temporary, your tax

home does not change. You are consideredto be away from home for the whole period,and your travel expenses are deductible.Generally, a temporary assignment in a singlelocation is one that is realistically expected tolast (and does in fact last) for one year or less.

However, if your assignment or job is in-definite, that location becomes your new taxhome and you cannot deduct your travel ex-penses while there. Your assignment or jobin a single location is considered indefinite ifit is realistically expected to last for more thanone year, whether or not it actually lasts formore than one year.

If your assignment is indefinite, you mustinclude in your income any amounts you re-ceive from your employer for living expenses,even if they are called travel allowances andyou account to your employer for them. Youmay be able to deduct the cost of relocatingto your new tax home as a moving expense.See Publication 521, Moving Expenses, formore information.

Exception for federal crime investigations.If you are a federal employee participating ina federal crime investigation, you may be ableto deduct travel expenses even if you areaway from your tax home for more than oneyear.

The Attorney General must certify that youare traveling:

1) For the federal government,

Chapter 1 Travel Expenses Page 3


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2) In a temporary duty status, and

3) To investigate or provide support ser-vices for the investigation of a federalcrime.

If you qualify, the 1-year rule for deductingbusiness travel expenses when away fromyour tax home does not apply.

CAUTION

!As this publication was being pre-pared for print, Congress was con-sidering legislation that would expand

the definition in (3) to include prosecution ofa federal crime. See Publication 553, High-lights of 1997 Tax Changes.

Determining temporary or indefinite. Youmust determine whether your assignment istemporary or indefinite when you start work.If you expect employment to last for one yearor less, it is temporary unless there are factsand circumstances that indicate otherwise.Employment that is initially temporary maybecome indefinite due to changed circum-stances. A series of assignments to the samelocation, all for short periods but that togethercover a long period, may be considered anindefinite assignment.

The following examples illustrate whenyou can and cannot deduct travel expenses

for a temporary assignment.

Example 1. You are a constructionworker. You live and regularly work in LosAngeles. You are a member of a trade unionin Los Angeles that helps you get work in theLos Angeles area. Because of a shortage ofwork, you took a job on a construction projectin Fresno. Your job was scheduled to end ineight months, and you planned to return toLos Angeles at that time. The job actuallylasted 10 months, after which time you re-turned to Los Angeles. Your family continuedto live in your home in Los Angeles.

While in Fresno, you lived in a trailer youown. You returned to Los Angeles mostweekends and maintained contact with thelocal union to see if you could get work in LosAngeles. You realistically expected the job inFresno to last eight months. The job actuallydid last less than one year. Because you ex-pected to return home when it ended, your taxhome is in Los Angeles for travel expensededuction purposes.

Example 2. The facts are the same as inExample 1, except that you realistically ex-pected the work in Fresno to be completed in18 months. The job actually was completedin 10 months.

Your job in Fresno is indefinite becauseyou realistically expected the work to lastlonger than one year, even though it actuallylasted less than one year. You cannot deductany travel expenses you paid or incurred in

Fresno.Example 3. The facts are the same as in

Example 1, except that you realistically ex-pected the work in Fresno to be completed in9 months. After 8 months, however, you wereasked to remain for 7 more months (for a totalactual stay of 15 months).

Initially, you realistically expected the jobin Fresno to last for only 9 months. However,due to changed circumstances occurring after8 months, it was no longer realistic for you toexpect that the job in Fresno would last forone year or less. You can only deduct yourtravel expenses for the first 8 months. Youcannot deduct any travel expenses you paidor incurred after that time.

Going home on days off. If you go back toyour tax home from a temporary assignmenton your days off, you are not considered awayfrom home while you are in your hometown.You cannot deduct the cost of your meals andlodging there. However, you can deduct yourtravel expenses, including meals and lodging,while traveling from the area of your tempo-rary place of work to your hometown and backto work. You can claim these expenses up tothe amount it would have cost you for mealsand lodging had you stayed at your temporaryplace of work.

If you keep your hotel room during yourvisit home, you can deduct the cost of yourhotel room. In addition, you can deduct yourexpenses of returning home up to the amountyou would have spent for meals had youstayed at your temporary place of work.

Probationary work period. If you take a jobthat requires you to move, with the under-standing that you will keep the job if your workis satisfactory during a probationary period,the job is indefinite. You cannot deduct anyexpenses for meals and lodging for theprobationary period.

Members of the Armed Forces. If you area member of the U.S. Armed Forces on apermanent duty assignment overseas, youare not traveling away from home. You can-not deduct your expenses for meals andlodging. You cannot deduct these expenseseven if you have to maintain a home in theUnited States for your family members whoare not allowed to accompany you overseas.If you are transferred from one permanentduty station to another, you may havedeductible moving expenses, which are ex-plained in Publication 521.

A naval officer assigned to permanentduty aboard a ship that has regular eating andliving facilities has a tax home aboard ship fortravel expense purposes.

What Are TravelExpenses?Once you have determined that you are trav-eling away from your tax home, you can de-termine what travel expenses are deductible.

RECORDS

When you travel away from home onbusiness, you should keep records ofall the expenses you incur and any

advances you receive from your employer.You can use a log, diary, notebook, or anyother written record to keep track of your ex-penses. The types of expenses you need torecord, along with supporting documentation,are described in Table 4.

Deductible Travel ExpensesDeductible travel expenses include those or-dinary and necessary expenses you incurwhile traveling away from home on business.The type of expense you can deduct dependson the facts and your circumstances.

Table 1 summarizes travel expenses youmay be able to deduct. You may have otherdeductible travel expenses that are not cov-ered there, depending on the facts and yourcircumstances.

Additional rules on the cost of meals andon paying travel expenses for others are ex-plained next.

Meals. You cannot deduct the cost of mealsif it is not necessary for you to stop for sleepor rest to properly perform your duties unlessyou meet the rules for business enter-tainment. These rules are explained in chap-ter 2.

50% limit on meals. You can use eitherthe actual cost of your meals or a standardamount to figure your meals expense. (SeeStandard Meal Allowance later in this chap-ter.) However, you can deduct only 50% ofthe cost of your unreimbursed business-related meals.

If you are reimbursed for these expenses,how you apply the 50% limit depends onwhether your employer's reimbursement planwas accountable or nonaccountable. Thislimit applies whether the unreimbursed mealexpense is for business travel or businessentertainment. Chapter 2 discusses the 50%limit in more detail, and chapter 6 discussesaccountable and nonaccountable plans.

Lavish or extravagant. You cannot de-duct expenses for meals to the extent theyare lavish or extravagant. An expense is notconsidered lavish or extravagant if it is rea-sonable based on the facts and circum-stances. Expenses will not be disallowedmerely because they are more than a fixeddollar amount or take place at deluxe restau-

rants, hotels, nightclubs, or resorts.

Travel expenses for another individual. Ifa spouse, dependent, or other individual goeswith you (or your employee) on a business tripor to a business convention, you generallycannot deduct his or her travel expenses. Youcan only deduct the travel expenses you payor incur for an accompanying individual if thatindividual:

1) Is your employee,

2) Has a bona fide business purpose for thetravel, and

3) Would otherwise be allowed to deductthe travel expenses.

Exception for business associate. If abusiness associate travels with you andmeets the conditions in (2) and (3) above, youcan claim the deductible travel expenses youpay for that person. A business associate issomeone with whom you can reasonably ex-pect to actively conduct business. It does notmatter if you have already conducted busi-ness with the person as long as you reason-ably expect to do so. A business associatecan be a customer, client, supplier, employee,agent, partner, or professional advisor.

Bona fide business purpose. For abona fide business purpose to exist, you mustprove a real business purpose for the indi-vidual's presence. Incidental services, suchas typing notes or assisting in entertainingcustomers, are not enough to warrant a de-duction.

Example. Jerry drives to Chicago onbusiness and takes his wife, Linda, with him.Linda is not Jerry's employee. Even if herpresence serves a bona fide business pur-pose, her expenses are not deductible.

Jerry pays $115 a day for a double room.A single room costs $90 a day. He can deductthe total cost of driving his car to and fromChicago, but only $90 a day for his hotelroom. If he uses public transportation, he candeduct only his fare.



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Table 1.

IF you haveexpenses for:

Transportation

THEN you can deduct the costs of:

Fares for these and other types of transportation that take you toor from:

Tips

Other

Taxi, commuterbus, and airportlimousine

Baggage andshipping

Car

Lodging and meals

Cleaning

Telephone

Sending baggage and sample or display material between yourregular and temporary work locations.

Operating and maintaining your car when traveling away fromhome on business. You may deduct actual expenses or thestandard mileage rate (if you own the car), includingbusiness-related tolls and parking. If you lease a car while awayfrom home on business, you can deduct only the business-relatedcosts of the lease. This includes gas, oil, and repairs.

Your lodging and meals if your business trip is overnight or longenough that you need to stop for sleep or rest to properly performyour duties. Meals include amounts spent for food, beverages,taxes, and related tips. See Mealsfor additional rules and limits.

Dry cleaning and laundry.

Business calls while on your business trip. This includes businesscommunication by fax machine or other communication devices.

Tips you pay for any expenses in this chart.

Other similar ordinary and necessary expenses related to your

business travel. These expenses might include transportation to orfrom a business meal, public stenographers fees, computer rentalfees, and operating and maintaining a house trailer.

Travel by airplane, train, bus, or car between your home and yourbusiness destination. If you were provided with a ticket or you areriding free as a result of a frequent traveler or similar program,your cost is zero. If you travel by ship, see Luxury Water Traveland Cruise ships(under Conventions) for additional rules andlimits.

Travel Expenses You Can DeductThis chart summarizes expenses you can deduct when you travel away from homefor business purposes. Additional rules on meals and paying travel expenses forothers are explained under Deductible Travel Expenses.

1) The airport or station and your hotel, and

2) The hotel and the work location of your customers or clients,your business meeting place, or your temporary work location.

You may be considered to indirectly ownstock, for purposes of (2), if you have an in-terest in a corporation, partnership, estate,or trust that owns the stock or if a familymember or partner owns the stock.

Limit on standard meal allowance. Ifyou are not reimbursed or if you are reim-bursed under a nonaccountable plan for mealexpenses, you can deduct only 50% of thestandard meal allowance. If you are reim-bursed under an accountable plan and youare deducting amounts that are more thanyour reimbursements, you can deduct only50% of the excess amount. Accountable andnonaccountable plans are discussed inchapter 6.

Other expenses that can qualify for thestandard meal allowance. You can use thestandard meal allowance to prove meal ex-penses you incur when traveling in con-nection with investment and other income-producing property. You can also use it toprove meal expenses you incur when travel-ing for qualifying educational purposes. Youcannot use the standard meal allowance toprove the amount of your meals if you aretraveling for medical or charitable purposes.

Amount of standard meal allowance. Thestandard meal allowance is the federal M&IErate. For travel in 1997, the rate is $30 a dayfor most areas in the United States. Otherlocations in the United States are designatedas high-cost areas, qualifying for higherstandard meal allowances. Locations qualify-ing for rates of $34, $38, or $42 a day arelisted in Appendix A.

If you travel to more than one location inone day, use the rate in effect for the areawhere you stop for sleep or rest. If you workin the transportation industry, however, seeSpecial rate for transportation workers, laterin this section.

Standard meal allowance for areasoutside the continental United States. Thestandard meal allowance rates do not apply

to travel in Alaska, Hawaii, or any other lo-cations outside the continental United States.The federal per diem rates for these locationsare published monthly in the Maximum TravelPer Diem Allowances for Foreign Areas.

Your employer may have these ratesavailable, or you can purchase thepublication from the:

Superintendent of DocumentsU.S. Government Printing OfficeP.O. Box 371954Pittsburgh, PA 152507954

You can also order it by calling theGovernment Printing Office at

12025121800 (not a toll-freenumber).

Internet access. Per diem rates arealso available on the Internet.

If you have a computer and a modem, youcan access domestic per diem rates at:

www.policyworks.gov/perdiem

You can access foreign per diem rates at:

www.state.gov/www/perdiems

Standard Meal AllowanceYou generally can deduct a standard amountfor your daily meals and incidental expenses(M&IE) while you are traveling away fromhome on business. Incidental expenses in-clude, but are not limited to, your costs for thefollowing items:

1) Laundry, dry cleaning, and pressing ofclothing, and

2) Fees and tips for persons who provide

services, such as food servers and lug-gage handlers.

Incidental expenses do not include taxicabfares or the costs of telegrams or telephonecalls. In this publication, standard meal al-lowance refers to the federal rate for M&IE(meals and incidental expenses).

The standard meal allowance method isan alternative to the actual cost method. Itallows you to deduct a set amount, dependingon where and when you travel, instead ofkeeping records of your actual costs. If youuse the standard meal allowance, you stillmust keep records to prove the time, place,and business purpose of your travel. See therecordkeeping rules for travel in chapter 5.

CAUTION

!There is no optional standard lodgingamount similar to the standard mealallowance. Your allowable lodging

expense deduction is your actual cost.

Who can use the standard meal allowance.You can use the standard meal allowancewhether you are an employee or self-employed, and whether or not you are reim-bursed for your traveling expenses. You can-not use the standard meal allowance,however, if you are related to your employer

as defined next.Related to employer. You are related to

your employer if:

1) Your employer is your brother or sister,half-brother or half-sister, spouse, an-cestor, or lineal descendant,

2) Your employer is a corporation in whichyou own, directly or indirectly, more than10% in value of the outstanding stock,or

3) Certain fiduciary relationships exist be-tween you and your employer involvinggrantors, trusts, beneficiaries, etc.



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Special rate for transportation workers.You can use a special standard meal allow-ance if you work in the transportation industry.You are in the transportation industry if yourwork:

1) Directly involves moving people or goodsby airplane, barge, bus, ship, train, ortruck, and

2) Regularly requires you to travel awayfrom home and, during any single trip,

usually involves travel to areas eligiblefor different standard meal allowancerates.

If this applies to you, you can claim a $36 adaystandard meal allowance ($40 for traveloutside the continental United States).

Using the special rate for transportationworkers eliminates the need for you to deter-mine the standard meal allowance for everyarea where you stop for sleep or rest. If youchoose to use the special rate for any trip,however, you must continue to use the spe-cial rate (and not use the regular standardmeal allowance rates) for all trips you takethat year.

Travel for days you depart and return. Forboth the day your travel begins and the dayyour travel ends, you must prorate thestandard meal allowance. You can do so byone of two methods.

1) You can claim 3/4 of the standard mealallowance, or

2) You can use any method that you con-sistently apply and that is in accordancewith reasonable business practice.

Example. Jen is employed in NewOrleans as a convention planner. In March,

her employer sent her on a three-day trip toWashington, DC, to attend a planning semi-nar. She left her home in New Orleans at 10a.m. on Wednesday and arrived in Washing-ton, DC, at 5:30 p.m. After spending twonights there, she flew back to New Orleanson Friday and arrived back home at 8:00 p.m.Jen's employer gave her a flat amount tocover her expenses and included it with herwages.

Under Method 1, Jen can claim 21/2 daysof the standard meal allowance for Washing-ton, DC: 3/4 of the daily rate for Wednesdayand Friday (the days she departed and re-turned), and the full daily rate for Thursday.

Under Method 2, Jen could also use anymethod that she applies consistently and thatis in accordance with reasonable business

practice. For example, she could claim 3 daysof the standard meal allowance even thougha federal employee would be limited to only21/2 days.

Travel in the United StatesThe following discussion applies to travel inthe United States. For this purpose, theUnited States includes the 50 states and theDistrict of Columbia. The treatment of yourtravel expenses depends on how much ofyour trip was business related and on howmuch of your trip occurred within the UnitedStates.

Trip Primarily for BusinessYou can deduct all of your travel expenses ifyour trip was entirely business related. If yourtrip was primarily for business and, while atyour business destination, you extended yourstay for a vacation, made a nonbusiness sidetrip, or had other nonbusiness activities, youcan deduct your business-related travel ex-penses. These expenses include the travelcosts of getting to and from your businessdestination and any business-related ex-penses at your business destination.

Example. You work in Atlanta and takea business trip to New Orleans. On your wayhome, you stop in Mobile to visit your parents.You spend $630 for the 9 days you are awayfrom home for travel, meals, lodging, andother travel expenses. If you had not stoppedin Mobile, you would have been gone only 6days, and your total cost would have been$580. You can deduct $580 for your trip, in-cluding the cost of round-trip transportation toand from New Orleans. The cost of yourmeals is subject to the 50% limit on mealsmentioned earlier.

Trip Primarily for

Personal ReasonsIf your trip was primarily for personal reasons,such as a vacation, the entire cost of the tripis a nondeductible personal expense. How-ever, you can deduct any expenses you havewhile at your destination that are directly re-lated to your business.

A trip to a resort or on a cruise ship maybe a vacation even if the promoter advertisesthat it is primarily for business. The schedul-ing of incidental business activities during atrip, such as viewing videotapes or attendinglectures dealing with general subjects, will notchange what is really a vacation into a busi-ness trip.

Part of Trip Outsidethe United StatesIf part of your trip is outside the United States,use the rules described later in this chapterunder Travel Outside the United States forthat part of the trip. For the part of your tripthat is inside the United States, use the rulesin this section. Travel outside the UnitedStates does not include travel from one pointin the United States to another point in theUnited States. The following discussion canhelp you determine whether your trip wasentirely within the United States.

Public transportation. If you travel by publictransportation, any place in the United Stateswhere that vehicle makes a scheduled stopis a point in the United States. Once the ve-hicle leaves the last scheduled stop in theUnited States on its way to a point outside theUnited States, you apply the rules underTravel Outside the United States.

Example. You fly from New York toPuerto Rico with a scheduled stop in Miami.You return to New York nonstop. The flightfrom New York to Miami is in the UnitedStates, so only the flight from Miami to PuertoRico is outside the United States. Becausethere are no scheduled stops between PuertoRico and New York, all of the return trip isoutside the United States.

Private car. Travel by private car in theUnited States is travel between points in theUnited States, even though you are on yourway to a destination outside the UnitedStates.

Example. You travel by car from Denverto Mexico City and return. Your travel fromDenver to the border and from the borderback to Denver is travel in the United States,and the rules in this section apply. The rulesunder Travel Outside the United Statesapplyto 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 yourtakeoff and landing are in the United Statesis travel in the United States. This is true evenif part of your flight is over a foreign country.

Example. You fly nonstop from Seattleto Juneau. Although the flight passes overCanada, the trip is considered to be travel inthe United States. This is because both yourtakeoff and landing are in the United States.

Travel Outsidethe United StatesIf any part of your business travel is outsidethe United States, some of your deductionsfor the cost of getting to and from your desti-nation may be limited. For this purpose, theUnited States includes the 50 states and theDistrict of Columbia.

How much of your travel expenses youcan deduct depends in part upon how muchof your trip outside the United States wasbusiness related.

Travel Entirely for Business orConsidered Entirely for BusinessEven if your trip is not entirely for business,it may be considered entirely for business ifcertain conditions are met.

Travel entirely for business. If you traveloutside the United States and you spend theentire time on business activities, all yourtravel expenses of getting to and from yourbusiness destination are deductible.

Travel considered entirely for business.Even if you did not spend your entire time onbusiness activities, your trip is consideredentirely for business and you can deduct allof your business-related travel expenses ifyou meet at least one of the following fourexceptions.

Exception 1 No substantial control.Your trip is considered entirely for businessif you did not have substantial control over

arranging the trip. You are not considered tohave substantial control merely because youhave control over the timing of your trip.

You are considered not to have substan-tial control over your trip if you:

1) Are an employee who was reimbursedor paid a travel expense allowance,

2) Are not related to your employer, and

3) Are not a managing executive.

Related to your employer was definedearlier in this chapter under Standard MealAllowance. A managing executive is anemployee who has the authority and respon-sibility, without being subject to the veto of



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another, to decide on the need for the busi-ness travel.

A self-employed person generally hassubstantial control over arranging businesstrips.

Exception 2 Outside U.S. no morethan a week. Your trip is considered entirelyfor business if you were outside the UnitedStates for a week or less, combining businessand nonbusiness activities. One week meansseven consecutive days. In counting the days,do not count the day you leave the UnitedStates, but count the day you return to theUnited States.

Example. You traveled to Brussels pri-marily for business. You left Denver onTuesday and flew to New York. On Wednes-day, you flew from New York to Brussels, ar-riving the next morning. On Thursday andFriday, you had business discussions, andfrom Saturday until Tuesday, you weresightseeing. You flew back to New York, ar-riving Wednesday afternoon. On Thursday,you flew back to Denver. Although you wereaway from your home in Denver for more thana week, you were not outside the UnitedStates for more than a week. This is becausethe day you depart does not count as a dayoutside the United States. You can deduct

your cost of the round-trip flight betweenDenver and Brussels. You can also deductthe cost of your stay in Brussels for Thursdayand Friday while you conducted business.However, you cannot deduct the cost of yourstay in Brussels from Saturday throughTuesday because those days were spent onnonbusiness activities.

Exception 3 Less than 25% of timeon personal activities. Your trip is consid-ered entirely for business if you were outsidethe United States for more than a week, butyou spent less than 25% of the total time youwere outside the United States on nonbusi-ness activities. For this purpose, count boththe day your trip began and the day it ended.

Example. You flew from Seattle to Tokyo,where you spent 14 days on business and 5days on personal matters. You then flew backto Seattle. You spent one day flying in eachdirection. Because only 5/21 (less than 25%)of your total time abroad was for nonbusinessactivities, you can deduct as travel expenseswhat it would have cost you to make the tripif you had not engaged in any nonbusinessactivity. The amount you can deduct is thecost of the round-trip plane fare and 16 daysof meals (subject to the 50% limit), lodging,and other related expenses.

Exception 4 Vacation not a majorconsideration. Your trip is considered en-tirely for business if you can establish that apersonal vacation was not a major consider-ation, even if you have substantial controlover arranging the trip.

Travel not entirely for business. If you donot meet any of the above exceptions, youmay still be able to deduct some of your ex-penses. See Travel Primarily for Business,next.

Travel Primarily for BusinessIf you travel outside the United States prima-rily for business purposes but spend some ofyour time on nonbusiness activities, yougenerally cannot deduct all of your travel ex-penses. You can only deduct the business

portion of your cost of getting to and from yourdestination. You must allocate the costs be-tween your business and nonbusiness activ-ities to determine your deductible amount.See Travel allocation rules, below.

Exception. You do not have to allocateyour travel expenses if you meet one of thefour exceptions listed earlier under Travelconsidered entirely for business. In thosecases, you can deduct the total cost of gettingto and from your destination.

Travel allocation rules. If your trip outsidethe United States was primarily for businesspurposes, you must allocate your travel timeon a day-to-day basis between business daysand nonbusiness days. The days you departfrom and return to the United States are bothcounted as days outside the United States.

To figure the deductible amount of yourround-trip travel expenses, use the followingfraction. The numerator (top number) is thetotal number of business days outside theUnited States. The denominator (bottomnumber) is the total number of travel daysoutside the United States.

Counting business days. Your businessdays include transportation days, days yourpresence was required, days you spent onbusiness, and certain weekends and holi-days.

Transportation day. Count as a busi-ness day any day you spend traveling to orfrom a business destination. However, if be-cause of a nonbusiness activity you do nottravel by a direct route, your business daysare the days it would take you to travel areasonably direct route to your businessdestination. Extra days for side trips or non-business activities cannot be counted asbusiness days.

Presence required. Count as a businessday any day your presence is required at aparticular place for a specific business pur-pose. Count it as a business day even if youspend most of the day on nonbusiness activ-

ities.Day spent on business. If your principal

activity during working hours is pursuit of yourtrade or business, count the day as a busi-ness day. Also, count as a business day anyday you are prevented from working becauseof circumstances beyond your control.

Certain weekends and holidays. Countweekends, holidays, and other necessarystandby days as business days if they fallbetween business days. But if they followyour business meetings or activity and youremain at your business destination for non-business or personal reasons, do not countthem as business days.

Example 1. Your tax home is New York

City. You travel to Quebec where you havea business appointment on Friday. You haveanother appointment on the following Mon-day. Because your presence was required onboth Friday and Monday, they are businessdays. Because the weekend is betweenbusiness days, Saturday and Sunday arecounted as business days. This is true eventhough you use the weekend for sightseeing,personal visiting, or other nonbusiness activ-ity.

Example 2. If, in Example 1, you had noother business in Quebec after Friday, butstayed until Monday before starting home,Saturday and Sunday would be nonbusinessdays.

Nonbusiness activity on the way to orfrom your business destination. If you hada vacation or other nonbusiness activity be-tween the United States and your businessdestination, or between your business desti-nation and the United States, you must allo-cate your travel expenses between businessand nonbusiness days. You determine yourtotal allowable travel expenses as follows.

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

2) Multiply the result in (1) by the cost ofround-trip travel between the UnitedStates and your nonbusiness destina-tion.

3) Add to the result in (2) the round-trip costof travel between the United States andyour business destination minus theround-trip cost of travel between theUnited States and your nonbusinessdestination. This is the deductible partof your cost of getting to and from yourbusiness destination.

4) Add to the result in (3) your businesstravel expenses (such as meals, lodging,and taxi fares) while at your businessdestination. These are your total allow-

able travel expenses.

Example. You live in New York and flewto Paris on May 4 to attend a conference witha customer that began on May 5. The con-ference ended at noon on May 8. That even-ing you flew to Dublin where you visited withfriends until the afternoon of May 21, whenyou flew home to New York. The primarypurpose for the trip was to attend the confer-ence.

If you had not stopped in Dublin, youwould have arrived home the evening of May8. You were outside the United States morethan a week, and you are unable to show thatyou had no substantial control over arrangingthe trip or that a personal vacation was not amajor consideration in making the trip. May

4 through May 8 (5 days) are business daysand May 9 through May 21 (13 days) arenonbusiness days. You cannot deduct yourexpenses while in Dublin. You also cannotdeduct 13/18 of the cost of round-trip airfare andany other expenses from New York to Dublin.

You can deduct the cost of your meals(subject to the 50% limit), lodging, and otherbusiness-related travel expenses while inParis. You figure the deductible part of yourtravel between the United States and Parisas follows:

1) 5/18 of the round-trip airfare and otherexpenses between New York andDublin, plus

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

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

Nonbusiness activity at or beyond busi-ness destination. If you had a vacation orother nonbusiness activity at or beyond yourbusiness destination, you must allocate your



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travel expenses between your business andnonbusiness days. None of your travel ex-penses for nonbusiness activities at or be-yond your business destination are deduct-ible. You must also allocate your round-triptravel costs between the United States andyour business destination as follows.

Multiply the cost of your round-trip travelbetween the United States and your businessdestination by a fraction. The numerator (topnumber) is the number of business days. Thedenominator (bottom number) is the totalnumber of travel days.

Add to this result your other business-related travel expenses (such as meals,lodging, and taxi fares) at your businessdestination. The sum is your total deductibletravel expenses.

Example. Assume that the dates are thesame as in the prior example but that insteadof going to Dublin for your vacation you fly toVenice, Italy, for a vacation. You cannot de-duct any part of the cost of your trip from Paristo Venice and return to Paris. In addition, youcannot deduct 13/18 of the airfare and otherexpenses from New York to Paris and backto New York. You can deduct 5/18 of theround-trip plane fare and other travel ex-penses from New York to Paris, plus your

meals, lodging, and any other business ex-penses you had in Paris. If the round-tripplane fare and other travel expenses are$800 from New York to Paris, you can deducttravel costs of $222.22 (5/18 $800).

Other methods. You can use anothermethod of counting business days if you es-tablish that it more clearly reflects the timespent on nonbusiness activities outside theUnited States.

Travel Primarily for VacationIf you travel outside the United States prima-rily for vacation or for investment purposes,the entire cost of the trip is a nondeductible

personal expense. This is true even if youspend some time attending brief professionalseminars or a continuing education program.You can, however, deduct your registrationfees and any other expenses incurred thatwere directly related to your business.

Example. The university from which yougraduated has a continuing education pro-gram for members of its alumni association.This program consists of trips to various for-eign countries where academic exercises andconferences are set up to acquaint individualsin most occupations with selected facilities inseveral regions of the world. However, noneof the conferences are directed toward spe-cific occupations or professions. It is up toeach participant to seek out specialists andorganizational settings appropriate to his orher occupational interests.

Three-hour sessions are held each dayover a 5-day period at each of the selectedoverseas facilities where participants canmeet with individual practitioners. These ses-sions are composed of a variety of activitiesincluding workshops, mini-lectures, role play-ing, skill development, and exercises. Pro-fessional conference directors schedule andconduct the sessions. Participants canchoose those sessions they wish to attend.

You can participate in this program sinceyou are a member of the alumni association.You and your family take one of the trips. Youspend about 2 hours at each of the planned

sessions. The rest of the time you go touringand sightseeing with your family. The triplasts less than 1 week.

Your travel expenses for the trip are notdeductible since the trip was primarily a va-cation. However, registration fees and anyother incidental expenses incurred by you forthe five planned sessions you attended thatare directly related and beneficial to yourbusiness are deductible business expenses.These expenses should be specifically statedto ensure proper allocation of your deductiblebusiness expenses.

Luxury Water TravelIf you travel by ocean liner, cruise ship, orother form of luxury water transportation forthe purpose of carrying on your trade orbusiness, there is a limit on the amount youcan deduct. You cannot deduct more thantwice the federal per diem rate allowable atthe time of your travel. For purposes of thislimit, the federal per diem is the highestamount allowed as a daily allowance for livingexpenses to employees of the executivebranch of the federal government while theyare away from home but in the United States.

Daily limit on luxury water travel. The

highest per diem amount allowed and thedaily limit for luxury water travel in 1997 isshown in the following table.

Example. Caroline, a travel agent, tookan ocean liner from New York to London,England, on business in May. Her expensefor the 6-day cruise was $2,600. Caroline'sdeduction for the cruise cannot exceed

$2,508 (6 days $418 daily limit).

Meals and entertainment. If your expensesfor luxury water travel include separatelystated amounts for meals or entertainment,those amounts are subject to the 50% limiton meals and entertainment before you applythe daily limit. For a discussion of the 50%limit, see chapter 2.

Example. In the previous example,Caroline's luxury water travel had a total costof $2,600. Of that amount, $1,600 was sepa-rately stated as meals and entertainment.Caroline, who is self-employed, is not reim-bursed for any of her travel expenses.Caroline computes her deductible travel ex-penses as follows.

Caroline's deduction for her cruise is limitedto $1,800, even though the per diem rate ishigher.

Not separately stated. If your meal orentertainment charges are not separatelystated or are not clearly identifiable, you do

not have to allocate any portion of the totalcharge to meals or entertainment.

ExceptionsThe per diem rule does not apply to expensesyou incurred to attend a convention, seminar,or meeting on board a cruise ship. See Cruiseships, under Conventions, next.

ConventionsYou can deduct your travel expenses when

you attend a convention if you can show thatyour attendance benefits your trade or busi-ness. You cannot deduct the travel expensesfor your family. If the convention is for in-vestment, political, social, or other purposesunrelated to your trade or business, you can-not deduct the expenses. Nonbusiness ex-penses, such as social or sightseeing ex-penses, are personal expenses and are notdeductible.

Your appointment or election as a dele-gate does not, in itself, entitle you to or de-prive you of a deduction. Your attendancemust be connected to your own trade orbusiness.

Convention agenda. The agenda of the

convention does not have to deal specificallywith your official duties or the responsibilitiesof your position or business. It is enough if theagenda is so related to your active trade orbusiness and your responsibilities that at-tendance for a business purpose is justified.

Conventions Held Outsidethe North American AreaYou cannot deduct expenses for attending aconvention, seminar, or similar meeting heldoutside the North American area unless themeeting is directly related to your trade orbusiness. Also, it must be as reasonable tohold the meeting outside the North Americanarea as in it. If the meeting meets these re-quirements, you also must satisfy the rules for

deducting expenses for business trips ingeneral, discussed earlier under Travel Out-side the United States.

North American area. The North Americanarea includes:

Reasonableness test. The following factorsmust be taken into account to determine if itwas reasonable to hold the meeting outsidethe North American area:

1) The purpose of the meeting and the ac-tivities taking place at the meeting,

2) The purposes and activities of the spon-soring organizations or groups,

3) The homes of the active members of thesponsoring organizations and the places

Highest Daily Limi t1997 Federal on LuxuryDates Per Diem Water Travel

Jan. 1- Mar. 31 $ 223 $ 446Apr. 1- Apr. 30 214 428May 1- May 31 209 418June 1- Oct. 31 221 442Nov. 1- Dec. 31 223 446

American Samoa Kingman ReefBaker Island Marshall IslandsBarbados MexicoBermuda MicronesiaCanada Midway IslandsCosta Rica Northern MarianaDominica IslandsDominican Republic PalauGrenada PalmyraGuam Puerto RicoGuyana Saint LuciaHonduras Trinidad and Tobago

Howland Island USAJamaica U.S. Virgin IslandsMeals and entertainment .............. $1,600Jarvis Island Wake Island50% limit ........................................ .50Johnston IslandAllowable meals & entertainment . $ 800

Other luxury water travel expenses + 1,000Allowable cost before the daily limit ............ $1,800

Daily limit for May 1997 ................ $418Times number of days ......... ......... 6Maximum luxury water travel deduction ...... $2,508Amount of allowable deduction ................... $1,800



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at which other meetings of the sponsor-ing organizations or groups have beenor will be held, and

4) Other relevant factors you may present.

Cruise ships. You can deduct up to $2,000per year of the expenses of attending con-ventions, seminars, or similar meetings heldon cruise ships. You must, however, establishthat the meeting is directly related to yourtrade or business. All ships that sail are con-sidered cruise ships.

You can deduct these expenses if all ofthe following are true.

1) The cruise ship is a vessel registered inthe United States.

2) All of the cruise ship's ports of call arelocated in the United States or in pos-sessions of the United States.

3) You attach to your return a writtenstatement signed by you that includes:

a) The total days of the trip, excludingthe days of transportation to andfrom the cruise ship port,

b) The number of hours each day thatyou devoted to scheduled business

activities, andc) A program of the scheduled busi-

ness activities of the meeting.

4) You attach to your return a writtenstatement signed by an officer of the or-ganization or group sponsoring themeeting that includes:

a) A schedule of the business activ-ities of each day of the meeting, and

b) The number of hours you attendedthe scheduled business activities.

2.

EntertainmentExpenses

You may be able to deduct business-related entertainment expenses you have forentertaining a client, customer, or employee.The rules and definitions are summarized inTable 2.

To be deductible, the expense must beboth ordinary and necessary. An ordinaryexpense is one that is common and accepted

in your field of business, trade, or profession.A necessary expense is one that is helpfuland appropriate for your business. An ex-pense does not have to be indispensable tobe considered necessary.

In addition, the entertainment expensemust meet one of two tests:

1) Directly-related test, or

2) Associated test.

You must also meet the recordkeeping re-quirements discussed in chapter 5.

Even if you meet all the requirements forclaiming a deduction for entertainment ex-penses, the amount you can deduct may be

limited. Generally, you can deduct only 50%of your unreimbursed entertainment ex-penses. This limit is discussed later under50% Limit.

Club dues and membership fees. Youcannot deduct dues (including initiation fees)for membership in any club organized forbusiness, pleasure, recreation, or other socialpurpose. This rule applies to any membershiporganization if one of its principal purposes isto conduct entertainment activities for mem-

bers or their guests, or to provide membersor their guests with access to entertainmentfacilities, discussed later.

The purposes and activities of a club, notits name, will determine whether or not youcan deduct the dues. You cannot deduct duespaid to country clubs, golf and athletic clubs,airline clubs, hotel clubs, and clubs operatedto provide meals under circumstances gen-erally considered to be conducive to businessdiscussions.

Entertainment facilities. Generally, youcannot deduct any expenses for the cost ofusing an entertainment facility. This includesexpenses for depreciation and operatingcosts such as rent, utilities, maintenance andprotection.

An entertainment facility is any propertyyou own, rent, or use for entertainment. Ex-amples include a yacht, hunting lodge, fishingcamp, swimming pool, tennis court, bowlingalley, car, airplane, apartment, hotel suite, orhome in a vacation resort.

Out-of-pocket expenses. You can de-duct out-of-pocket expenses, such as for foodand beverages, catering, gas, and fishingbait, that you provided during entertainmentat a facility. These are not expenses for theuse of an entertainment facility. However,these expenses are subject to the directly-related and associated tests, and the 50%limit, all discussed later.

What EntertainmentExpensesAre Deductible?This section explains different types of enter-tainment expenses that you may be able todeduct.

Entertainment. Entertainment includes anyactivity generally considered to provideentertainment, amusement, or recreation.Examples include entertaining guests atnightclubs; at social, athletic, and sportingclubs; at theaters; at sporting events; onyachts; or on hunting, fishing, vacation, andsimilar trips.

Entertainment also may include meetingpersonal, living, or family needs of individuals,such as providing meals, a hotel suite, or acar to business customers or their families.

A meal as a form of entertainment.Entertainment includes the cost of a meal youprovide to a customer, or client, whether themeal is a part of other entertainment or byitself. A meal sold in the normal course ofyour business is not entertainment. Gener-ally, to deduct an entertainment-related meal,you or your employee must be present whenthe food or beverages are provided.

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

No double deduction allowed formeals. You cannot claim the cost of yourmeal as an entertainment expense if you arealso claiming the cost of your meal as a travelexpense.

Deduction may depend on your typeof business. Your kind of business maydetermine if a particular activity constitutesentertainment. For example, if you are adress designer and have a fashion show tointroduce your new designs to store buyers,the show generally is not considered enter-tainment. This is because fashion shows aretypical in your business. But, if you are anappliance distributor and hold a fashion showfor the spouses of your retailers, the showgenerally is considered entertainment.

Taking turns paying for meals or enter-tainment. Expenses are not deductiblewhen a group of business acquaintances taketurns picking up each others' meal or enter-tainment checks without regard to whetherany business purposes are served.

Lavish or extravagant expenses. Youcannot deduct expenses for entertainment tothe extent they are lavish or extravagant. Anexpense is not considered lavish or extrava-

gant if it is reasonable considering the factsand circumstances. Expenses will not be dis-allowed merely because they are more thana fixed dollar amount or take place at deluxerestaurants, hotels, nightclubs, or resorts.

Allocating between business and non-business expenses. If you entertain busi-ness and nonbusiness individuals at the sameevent, you must divide your entertainmentexpenses between business and nonbusi-ness. You can deduct only the business part.If you cannot establish the part of the expensefor each person participating, allocate theexpense to each participant on a pro ratabasis. For example, if you entertain a groupof individuals that includes yourself, three

business prospects, and seven social guests,only 4/11 of the expense qualifies for the de-duction. You cannot deduct the expenses forthe seven social guests because those costsare considered nonbusiness expenses.

Trade association meetings. You can de-duct entertainment expenses that are directlyrelated to and necessary for attending busi-ness meetings or conventions of certain ex-empt organizations. These organizations in-clude business leagues, chambers ofcommerce, real estate boards, trade associ-ations, and professional associations. Theexpenses of your attendance must be relatedto your active trade or business. These ex-penses are subject to the 50% limit on enter-

tainment expenses.

Entertainment tickets. The amount you candeduct for entertainment tickets is generallylimited to the face value of the ticket even ifyou paid a higher price. For example, youcannot deduct service fees you pay to ticketagencies or brokers or any amount over theface value of the tickets you pay to scalpers.

Exception for events that benefit char-itable organizations. Different rules applywhen the cost of a ticket to a sports eventbenefits a charitable organization. You cantake into account the full cost you pay for theticket, even if it is more than the face value,if:

Chapter 2 Entertainment Expenses Page 9


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1) The event's main purpose is to benefita qualified charitable organization,

2) The entire net proceeds go to the charity,and

3) The event uses volunteers to performsubstantially all the event's work.

The 50% limit on entertainment does not ap-ply to any expense covered by a packagedeal involving a ticket to such a charitablesports event.

Example 1. A golf tournament is organ-ized by the local volunteer fire company withall of the net proceeds from the event goingto the acquisition of new fire equipment. Thevolunteers will run the tournament. You candeduct the entire cost of tickets to this eventif they otherwise qualify as an entertainmentexpense.

Example 2. You purchase tickets to acollege football game through a ticket broker.After having a business discussion, you takea client to the game. Net proceeds from thegame go to colleges that qualify as charitableorganizations. However, since the collegesalso pay individuals to perform services, suchas coaching and recruiting, you can only use

the face value of the tickets in determiningyour deduction. Also, your deduction is sub-

ject to the 50% limit.

Skyboxes and other private luxury boxes.If you rent a skybox or other private luxurybox for more than one event at the samesports arena, your deduction is generally lim-ited to the price of a nonluxury box seat ticket.

In determining whether a skybox has beenrented for more than one event, each gameor other performance counts as one event.Renting a skybox for a series of games, suchas the World Series, counts as renting it formore than one event. In addition, all skyboxesthat you rent in the same arena, along withany rentals by related parties, are considered

in making this determination. Related partiesinclude:

1) Family members (spouses, ancestors,and lineal descendants),

2) Parties who have made a reciprocal ar-rangement involving the sharing ofskyboxes,

3) Related corporations,

4) A partnership and its principal partners,and

5) A corporation and a partnership withcommon ownership.

Example. You pay $3,000 to rent a10-seat skybox at X Stadium for three base-ball games. The cost of regular nonluxury boxseats at each event is $20 a seat. The al-lowable amount (subject to the 50% limit) is$600 [(10 seats $20 each) 3 events].

Food and beverages in skybox seats.If expenses for food and beverages are sep-arately stated, these expenses can be de-ducted in addition to the amounts allowablefor the skybox, subject to the requirementsand limits that apply. The amounts separatelystated for food and beverages must be rea-sonable. You cannot inflate the charges forfood and beverages to circumvent the limiteddeduction for skybox rentals.

Table 2. When Are Entertainment Expenses Deductible?

Definitions

Tests to be met

Other rules

General Rule You can deduct ordinary and necessary expenses to entertain aclient, customer, or employee if the expenses meet thedirectly-related test or the associated test.

Entertainment includes any activity generally considered toprovide entertainment, amusement, or recreation, and includesmeals provided to a customer or client.

An ordinary expense is one that is common and accepted in yourfield of business, trade, or profession.

A necessary expense is one that is helpful and appropriate,although not necessarily indispensable, for your business.

Directly-related test

Entertainment took place in a clear business setting, or

Main purpose of entertainment was the active conduct ofbusiness, and

You had more than a general expectation of getting income orsome other specific business benefit.

Associated test

Entertainment is associated with your trade or business, and

Entertainment directly precedes or follows a substantial businessdiscussion.

You cannot deduct the cost of your meal as an entertainmentexpense if you are claiming the meal as a travel expense.

You can deduct expenses only to the extent they are not lavish orextravagant under the circumstances.

You generally can deduct only 50% of your unreimbursedentertainment expenses (see 50% Limit).

You did engage in business with the person during theentertainment period, and

Directly-Related TestTo meet the directly-related test for enter-

tainment expenses (including entertainment-related meals), you must show that:

1) The main purpose of the combinedbusiness and entertainment was the ac-tive conduct of business,

2) You did engage in business with theperson during the entertainment period,and

3) You had more than a general expecta-tion of getting income or some otherspecific business benefit at some futuretime.

Business is generally not considered tobe the main purpose when business andentertainment are combined on hunting orfishing trips, or on yachts or other pleasureboats. Even if you show that business was themain purpose, you generally cannot deductthe expenses for the use of an entertainmentfacility. See Entertainment facilitiesearlier inthis chapter.

You must consider all the facts includingthe nature of the business transacted and thereasons for conducting business during theentertainment. It is not necessary to devotemore time to business than to entertainment.However, if the business discussion is onlyincidental to the entertainment, it is not di-rectly related.

You do not have to show that businessincome or other business benefit actually re-sulted from each entertainment expense.

Clear business setting. If the entertainmenttakes place in a clear business setting and isfor your business or work, the expenses areconsidered directly related to your businessor work. The following situations are exam-ples of entertainment in a clear business set-ting:

1) Entertainment in a hospitality room at aconvention where business goodwill iscreated through the display or discussionof business products,

2) Entertainment that is mainly a price re-bate on the sale of your products (suchas a restaurant owner providing an oc-

casional free meal to a loyal customer),and

3) Entertainment of a clear business natureoccurring under circumstances wherethere is no meaningful personal or socialrelationship between you and the per-sons entertained. An example is enter-tainment of business and civic leadersat the opening of a new hotel or playwhen the purpose is to get businesspublicity rather than to create or maintainthe goodwill of the persons entertained.

Expenses not considered directly related.Expenses generally are not considered di-rectly related when entertainment occurs

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where, because of substantial distractions,there is little or no possibility of engaging inthe active conduct of business. Examples are:

1) A meeting or discussion at a nightclub,theater, or sporting event,

2) A meeting or discussion during what isessentially a social gathering, such as acocktail party, or

3) A meeting with a group that includespersons who are not business associ-ates at places such as cocktail lounges,country clubs, golf clubs, athletic clubs,or vacation resorts.

You may prove that the entertainment is di-rectly related by showing that you engaged ina substantial business discussion during theentertainment.

Associated TestEven if your expenses do not meet thedirectly-related test, they may meet the as-sociated test.

To meet the associated test for enter-tainment expenses (including entertainment-related meals), you must show that theentertainment:

1) Is associated with your trade or busi-ness, and

2) Directly precedes or follows a substantialbusiness discussion (defined later).

Generally, any ordinary and necessaryexpense is associated with the active conductof your trade or business if you can show thatyou had a clear business purpose for havingthe expense. The purpose may be to get newbusiness or to encourage the continuation ofan existing business relationship. However, ifpart of the entertainment expense is for per-sons not closely connected with your guestswho attended the substantial business dis-cussion, that part of the expense would not

qualify for the associated test.

Substantial business discussion. Whethera business discussion is substantial dependson all the facts of each case. You must showthat you or your representative actively en-gaged in a discussion, meeting, negotiation,or other business transaction to get incomeor some other specific business benefit. Youmay be able to deduct goodwill entertainment.

The meeting does not have to be for anyspecified length of time, but you must showthat the business discussion was substantialin relation to the meal or entertainment. It isnot necessary that you devote more time tobusiness than to entertainment. You do nothave to discuss business during the meal orentertainment.

Meetings at conventions. You are con-sidered to have a substantial business dis-cussion if you attend meetings at a conven-tion or similar event, or at a trade or businessmeeting sponsored and conducted by abusiness or professional organization. How-ever, you must attend the convention ormeeting to further your trade or business. Inaddition, the organization that sponsors theconvention or meeting must schedule a pro-gram of business activities that is the mainactivity of the convention or meeting.

Directly before or after business dis-cussion. Entertainment that is held on thesame day as the business discussion is con-

sidered to be held directly before or after thebusiness discussion. However, if the enter-tainment and the business discussion are notheld on the same day, you must consider thefacts of each case to see if the associated testis met. Among the facts to consider are theplace, date, and duration of the businessdiscussion.

Also, if you or your business associatesare from out of town, you must consider thedates of arrival and departure, and the rea-sons the entertainment and the discussion didnot take place on the same day.

Example. A group of business associatescomes from out of town to your place ofbusiness to hold a substantial business dis-cussion. If you entertain those businessguests and their spouses on the evening be-fore the business discussion, or on the even-ing of the day following the business dis-cussion, the entertainment generally isconsidered to be held directly before or afterthe discussion. The expense meets the as-sociated test.

Expenses for spouses. You generally can-not deduct the cost of entertainment for yourspouse or for the spouse of a business cus-tomer. However, you can deduct these costs

if you can show that you had a clear businesspurpose, rather than a personal or socialpurpose, for providing the entertainment.

Example. You entertain a business cus-tomer. The cost is an ordinary and necessarybusiness expense and is allowed under theentertainment rules. The customer's spouse

joins you because it is impractical to entertainthe customer without the spouse. You candeduct the cost of entertaining the customer'sspouse as an ordinary and necessary busi-ness expense. Furthermore, if your spouse

joins the party because the customer'sspouse is present, the cost of the enter-tainment for your spouse is also an ordinaryand necessary business expense.

50% LimitIn general, you can deduct only 50% of yourbusiness-related meal and entertainment ex-penses. This limit applies to employees ortheir employers, and to self-employed per-sons (including independent contractors) ortheir clients, depending on whether the ex-penses are reimbursed. Figure A summarizesthe general rules explained in this section.

The 50% limit applies to business mealsor entertainment expenses incurred while:

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

2) Entertaining business customers at your

place of business, a restaurant, or otherlocation, or

3) Attending a business convention or re-ception, business meeting, or businessluncheon at a club.

Covered expenses. Taxes and tips relatingto a business meal or entertainment activityare included in the amount that is subject tothe 50% limit. Expenses such as covercharges for admission to a nightclub, rentpaid for a room in which you hold a dinneror cocktail party, or the amount paid forparking at a sports arena are subject to the50% limit. However, the cost of transportationto and from a business meal or a business-

related entertainment activity is not subject tothe 50% limit.

Separating costs. If you pay or incur anexpense for goods and services consistingof meals, entertainment, and other services(such as lodging or transportation), you mustallocate that expense between the cost ofmeals and entertainment and the cost of theother services. You must have a reasonablebasis for making this allocation. For example,you must allocate your expenses if a hotelincludes one or more meals in its roomcharge, or if you are provided with one perdiem amount to cover both your lodging andmeal expenses.

Application of 50% limit. The 50% limit onmeal and entertainment expenses applies ifthe expense is otherwise deductible and isnot covered by one of the exceptions dis-cussed later.

The 50% limit also applies to activities thatare not a trade or business. It applies to mealand entertainment expenses incurred for theproduction of income, including rental or roy-alty income. It also applies to the cost ofmeals included in deductible educational ex-penses.

When to apply the 50% limit. You apply the50% limit after determining the amount thatwould otherwise qualify for a deduction. Youfirst have to determine the amount of mealand entertainment expenses that would bedeductible under the rules discussed in thispublication.

To determine the actual amount you candeduct if you are an employee, you must ap-ply the 2%-of-adjusted-gross-income limit onSchedule A (Form 1040).

Example 1. You spend $100 for abusiness-related meal. If $40 of that amountis not allowable because it is considered lav-ish and extravagant, the remaining $60 issubject to the 50% limit. Your deduction can-not be more than $30 (.50 $60).

Example 2. You purchase two tickets toa concert and give them to a client. You pur-chased the tickets through a ticket agent. Youpaid $150 for the two tickets, which had aface value of $60 each ($120 total). Your de-duction cannot be more than $60 (.50 $120).

Exceptions to the 50% LimitThe 50% limit on meal and entertainmentexpenses applies if the expense is otherwisedeductible based on the tests and rules ex-plained in this chapter or in chapter 1.

You can use Figure A to help you deter-mine if the 50% limit applies to you. Yourmeal or entertainment expense is notsubject

to the 50% limit if the expense meets one ofthe following exceptions.

Employee's reimbursed expenses. As anemployee, you are not subject to the 50% limitif your employer reimburses you under anaccountable plan and does not treat your re-imbursement as wages. Accountable plansare discussed in chapter 6.

Self-employed. If you are self-employed,your deductible meal and entertainment ex-penses are generally subject to the 50% limit.However, your expenses are not subject tothe 50% limit if you incur these expenses asan independent contractor, and:

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Figure A. Does the 50% Limit Apply to Your Expenses?

All employees and self-employed persons can use this chart.

Were your meal and entertainment expenses reimbursed?

If an employee, did you adequately accountto your employer under an accountable plan?If self-employed, did you provide the payer

with adequate records? (See chapter 6.)

Did your expenses exceed the reimbursement?

For the amount reimbursed.. For the excess amount..

Your meal and entertainment

expenses are NOT subject tothe 50% limit. However, sincethe reimbursement was nottreated as wages or as othertaxable income, you cannotdeduct the expenses.

Your meal andentertainment expensesARE subject tothe 50% limit.*

YesNo

No

Yes

YesNo

There are exceptions to this rule. For example, you are not subject to the 50% limit on meals andentertainment if:

A) You incur the expenses as a means of advertising to, or promoting goodwill in, the generalcommunity,

B) You pay the expenses as part of a package deal that includes a ticket to a charitable sportsevent (see Entertainment tickets), or

C) Your business involves the sale of meals and/or entertainment to the public.

*

$25 limit on business gifts. You can deductno more than $25 for business gifts you givedirectly or indirectly to any one person duringyour tax year. A gift to a company that is in-tended for the eventual personal use or ben-efit of a particular person or a limited classof people will be considered an indirect gift tothat particular person or to the individualswithin that class of people who receive thegift.

A gift to the spouse of a business cus-tomer or client is generally an indirect gift tothe customer or client. This rule does not ap-ply if you have an independent bona fidebusiness connection with the spouse and thegift is not intended for the other spouse'seventual use or benefit. These rules also ap-ply to gifts you give to any other familymember.

If you and your spouse both give gifts,both of you are treated as one taxpayer. Itdoes not matter whether you have separatebusinesses, are separately employed, orwhether each of you has an independentconnection with the recipient. If a partnershipgives gifts, the partnership and the partnersare treated as one taxpayer.

Incidental costs. Incidental costs, such asengraving on jewelry, or packaging, insuring,and mailing, are generally not included indetermining the cost of a gift for purposes ofthe $25 limit.

A related cost is considered incidental onlyif it does not add substantial value to the gift.For example, the cost of gift wrapping isconsidered an incidental cost. However, thepurchase of an ornamental basket for pack-aging fruit is not considered an incidental costof packaging if the basket has a substantialvalue compared to the value of the fruit.

Exceptions. The following items are not in-cluded in the $25 limit for business gifts.

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

a) Has your name clearly and perma-nently imprinted on the gift, and

b) Is one of a number of identical itemsyou widely distribute.

Examples include pens, desk sets,and plastic bags and cases.

2) Signs, display racks, or other promo-tional material to be used on the busi-ness premises of the recipient.

Employee achievement awards. Employeeachievement awards are not treated as gifts.For information on the requirements you mustmeet to deduct the cost of these awards, seeBonuses and Awards in chapter 2 of Publi