To Prevent Sunsetting, IRS Publishes Final Regs on Employee Reimbursements

 [4830-01]

 ACTION: Temporary and final regulations.

 SUMMARY: This document contains final regulations relating to the taxation of and reporting and withholding on employee business expense reimbursements and other expense allowance arrangements. The regulations affect employees who receive payments and payors who make payments under reimbursement or other expense allowance arrangements. The guidance is the same as that set forth in temporary regulations published in 1989 and 1990.

 EFFECTIVE DATE: December 7, 1992.

 FOR FURTHER INFORMATION CONTACT: Marianna Dyson, at 202-622-4606 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

Temporary regulations (TD 8189) under section 1.62-1T were first published in the Federal Register on March 28, 1988 (53 FR 9873). A cross-reference notice of proposed rulemaking (LR-97-96) was published in the Federal Register on the same day. Paragraphs (c) and (f) of section 1.62-1T of these temporary regulations were amended by temporary regulations (TD 8276) published in the Federal Register on December 12, 1989 (54 FR 51024). Paragraph (c) of section 1.62-1T was subsequently amended by temporary regulations (TD 8324) published in the Federal Register on December 17, 1990 (55 FR 51688). Cross-reference notices of proposed rulemaking (EE-8-89) were also published. Temporary regulations (TD 8004) under section 1.162-25T were first published in the Federal Register on January 7, 1985 (50 FR 747). A cross-reference notice of proposed rulemaking (LR-216-84) was published in the Federal Register on the same day. Section 1.162-25T(b) of these temporary regulations was amended by temporary regulations (TD 8276) published in the Federal Register on December 12, 1989 (54 FR 51026). A cross-reference notice of proposed rulemaking (EE-8-89) was also published. Temporary regulations (TD 8061) under section 1.274-5T were first published in the Federal Register on November 6, 1985 (50 FR 46006). Section 1.274-5T(g) of these temporary regulations was amended by temporary regulations (TD 8276) published in the Federal Register on December 12, 1989 (54 FR 51024). A cross-reference notice of proposed rulemaking (EE-8-89) was also published. Written comments were received from the public on the proposed regulations.

 Under section 7805(e) of the Internal Revenue Code, any temporary regulation issued after November 20, 1988, expires within 3 years after the date of its issuance. This Treasury decision adopts in final form portions of the temporary regulations that would otherwise expire within three years after the date of their issuance and revises cross references to these portions.

SPECIAL ANALYSES

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, these regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these regulations is Marianna Dyson, Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations), Internal Revenue Service. However, personnel from other offices of the Service and Treasury Department participated in their development.

LIST OF SUBJECTS IN 26 CFR 1.61-1 THROUGH 1.280H-1T

 Bonds, Income taxes, Reporting and recordkeeping requirements.

Treasury Decision 8451

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR part 1 is amended as follows:

PART 1 -- INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.62-1 is added to read as follows:

SECTION 1.62-1 ADJUSTED GROSS INCOME.

(a) [Reserved]

(b) [Reserved]

(c) DEDUCTIONS ALLOWABLE IN COMPUTING ADJUSTED GROSS INCOME. The deductions specified in section 62(a) for purposes of computing adjusted gross income are --

(1) Deductions set forth in section 1.62-1T(c); and

(2) Deductions allowable under part VI, subchapter B, chapter 1 of the Internal Revenue Code, (section 161 and following) that consist of expenses paid or incurred by the taxpayer in connection with the performance of services as an employee under a reimbursement or other expense allowance arrangement (as defined in section 1.62-2) with his or her employer. For the rules pertaining to expenses paid or incurred in taxable years beginning before January 1, 1989, see paragraphs (c)(2) and (f) (see section 1.62-1T(c)(2) and (f) (as amended in 26 CFR part 1 sections 1.61 to 1.169) revised April 1, 1992).

(d) through (h) [Reserved]

(i) EFFECTIVE DATE. Paragraph (c) of this section is effective for taxable years beginning on or after January 1, 1989.

Par. 3. Section 1.62-1T is amended as follows:

1. Paragraphs (c)(2) and (f) are removed and reserved.

2. In paragraph (e)(1), the parenthetical "(as defined in paragraph (f) of this section)" in the second sentence is removed.

Par. 4. Section 1.62-2 is amended as follows:

1. In the first sentence of paragraph (c)(1), the reference "sections 1.62-1T and 1.62-2" is removed and "sections 1.62-1, 1.62-1T, and 1.62-2" is added in its place.

2. In the third sentence of paragraph (c)(5), the reference "section 1.274-5T or section 1.162-17" is removed and "sections 1.274-5T and 1.274(d)-1 or section 1.162-17" is added in its place.

3. In paragraph (d)(3)(ii), the reference "section 1.274-5T(g)" is removed and "section 1.274(d)-1" is added in its place.

4. In the sixth and eighth sentences of paragraph (e)(2), the reference "section 1.274-5T(g)" is removed and "section 1.274(d)-1" is added in its place.

5. In paragraph (h)(2)(i)(B)(1), the reference "section 1.274-5T(g) or (j)" is removed and "section 1.274(d)-1 or section 1.274-5T(j)" is added in its place.

Par. 5. Section 1.132-5 is amended as follows:

1. In the last sentence of paragraph (b)(1)(iv), the reference "section 1.162-25T" is removed and "sections 1.162-25 and 1.162-25T" is added in its place.

Par. 6. Section 1.162-25 is added to read as follows:

SECTION 1.162-25 DEDUCTIONS WITH RESPECT TO NONCASH FRINGE BENEFITS.

(a) [Reserved]

(b) EMPLOYEE. If an employer provides the use of a vehicle (as defined in section 1.61-21(e)(2)) to an employee as a noncash fringe benefit and includes the entire value of the benefit in the employee's gross income without taking into account any exclusion for a working condition fringe allowable under section 132 and the regulations thereunder, the employee may deduct that value multiplied by the percentage of the total use of the vehicle that is in connection with the employer's trade or business (business value). For taxable years beginning before January 1, 1990, the employee may deduct the business value from gross income in determining adjusted gross income. For taxable years beginning on or after January 1, 1990, the employee may deduct the business value only as a miscellaneous itemized deduction in determining taxable income, subject to the 2-percent floor provided in section 67. If the employer determines the value of the noncash fringe benefit under a special accounting rule that allows the employer to treat the value of benefits provided during the last two months of the calendar year or any shorter period as paid during the subsequent calendar year, then the employee must determine the deduction allowable under this paragraph (b) without regard to any use of the benefit during those last two months or any shorter period. The employee may not use a cents-per-mile valuation method to determine the deduction allowable under this paragraph (b).

Par. 7. Section 1.162-25T is amended by removing and reserving paragraph (b).

Par. 8. Section 1.274(d)-1 is added to read as follows:

SECTION 1.274(d)-1 SUBSTANTIATION REQUIREMENTS.

(a) SUBSTANTIATION BY REIMBURSEMENT ARRANGEMENTS OR PER DIEM, MILEAGE, AND OTHER TRAVELING ALLOWANCES -- (1) IN GENERAL. The Commissioner may, in his discretion, prescribe rules in pronouncements of general applicability under which allowances for expenses described in paragraph (a)(2) of this section will, if in accordance with reasonable business practice, be regarded as equivalent to substantiation by adequate records or other sufficient evidence for purposes of section 1.274-5T(c) of the amount of such expenses and as satisfying, with respect to the amount of such expenses, the requirements of an adequate accounting to the employer for purposes of section 1.274-5T(f)(4). If the total allowance received exceeds the deductible expenses paid or incurred by the employee, such excess must be reported as income on the employee's return. See section 1.274-5T(j) relating to the substantiation of meal expenses while traveling away from home.

(2) ALLOWANCES FOR EXPENSES DESCRIBED. An allowance for expenses is described in this paragraph (a)(2) if it is a --

(i) Reimbursement arrangement covering ordinary and necessary expenses of traveling away from home (exclusive of transportation expenses to and from destination);

(ii) Per diem allowance providing for ordinary and necessary expenses of traveling away from home (exclusive of transportation costs to and from destination); or

(iii) Mileage allowance providing for ordinary and necessary expenses of local travel and transportation while traveling away from home.

(3) LIMITATION. A mileage allowance described in paragraph (a)(2)(iii) of this section is available only to the owner of a vehicle.

(b) [Reserved]

Par. 9. Section 1.274-5T is amended as follows:

1. In paragraph (e)(1)(ii), the reference "section 1.61-2T(e)(2)" is removed and "section 1.61-21(e)(2)" is added in its place and the reference "section 1.162-25T" is removed and "sections 1.162-25 and 1.162-25T" is added in its place.

2. Paragraph (g) is revised.

3. In paragraph (l), the reference to "section 1.61-2T(d)(1)(ii) and section 1.61-2T(e)(2)" is removed and "section 1.61-21(d)(1)(ii) and section 1.61-21(e)(2)" is added in its place.

4. In paragraph (m), the reference "section 1.132-5T(h)" is removed and "section 1.132-5(h)" is added in its place.

5. In paragraph (m), the reference "section 1.162-25T(b)" is removed and "section 1.162-25(b)" is added in its place.

6. The revision to paragraph (g) reads as follows:

SECTION 1.274-5T SUBSTANTIATION REQUIREMENTS (TEMPORARY).

* * * *

(g) SUBSTANTIATION BY REIMBURSEMENT ARRANGEMENTS OR PER DIEM, MILEAGE, AND OTHER TRAVELING ALLOWANCES. For guidance, see section 1.274(d)-1.

* * * * *