TD 8276 (Temporary)

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1990-1 C.B. 14; T.D. 8276;
1990 IRB LEXIS 2181, *
DEPARTMENT OF THE TREASURY
Treasury Decision 8276
1990-1 C.B. 14; T.D. 8276; 1990 IRB LEXIS 2181
January 1990
[*1]
SUBJECT MATTER: Section 62.-Adjusted Gross Income Defined
APPLICABLE SECTIONS:
26 CFR 1.62-IT: Adjusted gross income (temporary). Internal Revenue Service 26 CFR PARTS 1, 31,
AND 602
TEXT:
Employee Business Expenses-Reporting and With holding on Employee Business Expense
Reimbursements and Allowances
AGENCY:
Internal Revenue Service, Treasury.
ACTION:
Temporary and final regulations.
SUMMARY:
This document contains temporary and final regulations concerning the taxation of and reporting
and withholding on payments with respect to employee business expenses under a reimbursement
or other expense allowance arrangement. These temporary regulations reflect changes to the law
made by the Family Support Act of 1988. These temporary regulations will affect employees who
receive payments and payors who make payments under reimbursement or other expense
allowance arrangements. The text of the temporary regulations set forth in this document also
serves as the text of the proposed regulations cross-referenced in the notice of proposed rulemaking
in
[EE-8-89, page 616, this Bulletin].
EFFECTIVE DATES:
The provisions of these temporary regulations under § 1.62-1T are effective for expenses paid or
incurred in taxable years beginning before [*2] January 1, 1989. The income tax provisions of
these temporary regulations under § 1.62-2T are effective for taxable years beginning on or after
January 1, 1989, with respect to expenses paid or incurred in taxable years beginning on or after
January 1, 1989. The provisions of § 1.162-17 (e) (3) of these regulations are effective for taxable
years beginning on or after January 1, 1989. The provisions of § 1.274-5T (g) of these regulations
are effective upon publication. The provisions of § 1.162-25T of these regulations are effective upon

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publication. The reporting provisions of these temporary regulations under § 1.6041-3 (i) are
effective for payments made under reimbursement or other expense allowance arrangements on or
after January 1, 1989; however, a transition rule is provided under § 1.6041-3 (i) effective for
payments made prior to January 1, 1990. The amendments to §§ 31.3121 (a)-1 (h), 31.3231 (e)-1,
31.3306 (b)-1, and 31.3401 (a)-(1) (b) (2) of these regulations are effective for amounts that are
received by an employee on or after July 1, 1990, with respect to expenses paid or incurred on or
after July 1, 1990. The provisions of these temporary regulations under §§ 31.3121 (a)-2T, [*3]
31.3231 (e)-3T, 31.3306 (b)-2T, and 31.3401 (a)-2T regarding withholding and payment of
employment taxes are effective for payments made under reimbursement or other expense
allowance arrangements on or after July 1, 1990.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
This regulation is being issued without prior notice and public procedure pursuant to the
Administrative Procedure Act (5 U.S.C. 553). For this reason, the collection of information contained
in this regulation has been reviewed and, pending receipt and evaluation of public comments,
approved by the Office of Management and Budget (OMB) under control number 1545-1148. The
estimated average annual burden per-recordkeeper is 0.5 hour. This estimate is an approximation of
the average time expected to be necessary for a collection of information. It is based on such
information as is available to the Internal Revenue Service. Individual recordkeepers may require
greater or less time, depending on their particular circumstances.
For further information concerning this collection of information, and where to submit comments on
this collection of information and the accuracy of the estimated burden, and suggestions for
reducing [*4] this burden, please refer to the preamble to the cross-referenced notice of proposed
rulemaking published in
[EE-8-89, page 616, this Bulletin].
Background
This document contains amendments to the Income Tax Regulations (26 CFR Part 1) under sections
62, 162, 274 and 6041 of the Internal Revenue Code, and to the Employment Tax Regulations (26
CFR Part 31) under sections 3121, 3231, 3306, and 3401 of the Code as a result of the Family
Support Act of 1988, Public Law No. 100-485 [1989-2 C.B. 338].
Need For Temporary and Final Regulations
Because of the need for immediate guidance regarding the reporting and withholding requirements
of these regulations, it is impracticable and contrary to the public interest to issue these temporary
and final regulations with notice and public procedure under section 553 (b) of Title 5 of the United
States Code, or subject to the effective date limitation of section 553 (d) of Title 5.
Explanation of Provisions
Section 62 (a) of the Internal Revenue Code generally defines "adjusted gross income" as gross
income minus certain deductions. These "above-the-line" deductions are allowed without regard to
whether a taxpayer itemizes deductions and are not subject [*5] to the two-percent floor of
section 67. Among the above-the-line deductions, section 62 (a) (2) (A) allows an employee a
deduction for expenses (reimbursed employee business expenses) paid by the employee, in
connection with the performance of services as an employee, under a reimbursement or other
expense allowance arrangement with his or her employer. In addition, the above-the-line deduction
is available for reimbursement or other expense allowance arrangements maintained by an agent of
the employer or by a third party for whom the employee performs a service as an employee of the

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employer. Throughout these regulations, such employers, agents, and third parties are referred to
as "payors."
As amended, section 62 (c) provides that an arrangement will not be treated as a "reimbursement
or other expense allowance arrangement" for purposes of section 62 (a) (2) (A) unless-

1)the arrangement requires the employee to substantiate the expenses covered by the
arrangement to the payer, and

2)the arrangement requires the employee to return any amount in excess of the substantiated
expenses covered under the arrangement.

Reimbursement or Other Expense Allowance Arrangements
1. Defined
For purposes [*6] of the temporary regulations, a reimbursement or other expense allowance
arrangement is an arrangement that meets three requirements: (1) business connection, (2)
substantiation, and (3) returning amounts in excess of expenses.
2. Business Connection Requirement
An arrangement meets the business connection requirement under the temporary regulations if it
provides reimbursements, advances, or allowances (including per diem allowances, allowances for
meals and incidental expenses, and mileage allowances) for business expenses that are allowable as
deductions for expenses paid or incurred by an employee in connection with the performance of
services as an employee. The business connection requirement therefore requires a nexus between
an amount denominated an "advance" and the business expenses that it is anticipated the employee
will incur. For example, if an employer provides an employee with an "advance" of $3000 at a time
when it is not anticipated that the employee will incur travel or other expenses deductible in the
trade or business of being an employee, the "advance" does not meet the business connection
requirement and will not be treated as paid under an accountable plan.
3. Substantiation
In [*7] order to meet the substantiation requirement, the employee must be required to
substantiate the expenses covered by the arrangement to the payor. For example, to the extent
employee business expenses covered by such arrangements are governed by the substantiation
rules of section 274 (d), the employee must meet the substantiation requirements of that section,
which, for example, with respect to a travel expense, generally require substantiation of the
amount, time, place and business purpose of the expense.
Under section 274 (d), the Commissioner has the authority to provide simplified methods of
substantiation. The Service is publishing several such simplified methods of substantiation. Under
these simplified methods, known as "deemed substantiation" methods, employees are deemed to
have substantiated an amount of expenses equal to the lesser of the amount of the reimbursement
or the amount specified by the Service.
The methods of deemed substantiation available to employers will include methods applicable to

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lodging, meal and/or incidental expenses, both within and outside the continental United States, and
methods applicable to reimbursement of transportation expenses. Such methods [*8] will include
reimbursements paid under arrangements similar to the methods for reimbursing Federal
employees. In addition, deemed substantiation methods will be available for reimbursements paid at
a flat rate or under a stated schedule, such as reimbursements for lodging, meals and/or incidental
expenses calculated on the basis of hours worked or miles driven.
The Service will, in a separate announcement, request suggestions from taxpayers concerning
appropriate additional methods of deemed substantiation.
4. Returning Amounts in Excess of Expenses
In order to meet the requirement of returning amounts in excess of expenses, an arrangement must
require the employee to return any amount in excess of the substantiated expenses covered under
the arrangement. If an employee receives an advance for anticipated business expenses that
exceeds the amount of such expenses actually incurred and substantiated by the employee, but the
employee uses such excess to pay expenses incurred for other business expenses, the employee
need not return such excess to the payor.
The temporary regulations grant the Commissioner the authority to prescribe rules under which an
arrangement providing per diem allowances [*9] or mileage allowances will be treated as
satisfying the requirement of returning amounts in excess of expenses, even though an employee is
not required to return the portion of such an allowance that exceeds the amount of the employee's
expenses which is deemed substantiated under rules prescribed under section 274 (d), provided the
allowance is reasonably calculated not to exceed the amount of the employee's expenses or
anticipated expenses and the employee is required to return any portion of such an allowance which
relates to days or miles of travel not substantiated. For example, assume a payor provides an
employee an advance mileage allowance of $60, based on an anticipated 200 business miles at 30
cents-per-mile (at a time when the applicable standard mileage rate is 26 cents-per-mile), and the
employee substantiates 120 business miles. Under these rules, the requirement to return excess
amounts will be treated as satisfied if the employee is required to return the amount of the advance
allowance that is attributable to the 80 unsubstantiated business miles ($24.00), even though the
employee is not required to return the portion of the allowance ($4.80) that exceeds the amount
[*10] of the employee's expenses deemed substantiated ($31.20) pursuant to rules prescribed
under section 274 (d).
5. Timeliness
Both the requirement of substantiation and the requirement that excess reimbursements be
returned must be met within a reasonable period of time after an expense is paid or incurred. What
constitutes a reasonable period of time depends on the facts and circumstances. Thus, for example,
it is reasonable that an employee who is on an extended travel assignment would have a longer
period to substantiate expenses and return excess amounts than an employee who undertakes a
single overnight trip.
The regulations provide two safe harbor methods. Under the first, the requirements will be treated
as met within a reasonable period of time if an advance is made within 30 days of when an expense
is paid or incurred, an expense is substantiated within 60 days after it is paid or incurred, or an
excess amount is returned to the payor within 120 days after the expense is paid or incurred. Under
the second, the requirements will be treated as met within a reasonable period of time if an expense
is substantiated or an amount is returned within 120 days after the payor provides a periodic
[*11] statement (no less frequently than quarterly) of the amount paid under the arrangement
that exceeds the expenses the employee has substantiated. Both methods are intended solely as
safe harbors, and no adverse inference is intended with respect to amounts advanced,
substantiated, or returned after such periods. However, for purposes of withholding, a payor may
treat amounts substantiated or returned after such periods as not having been substantiated or
returned within a reasonable period of time.

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Reporting and Employment Taxes
The Conference Report on the Family Support Act of 1988 (H.R. Rep. No. 998, 100th Cong., 2d
Sess. 202-206 (1988)) provides that the regulations and rulings regarding the reporting of
employee business expense reimbursements and allowances generally are also to be revised to
conform to the changes in section 62 and to subject amounts treated as paid pursuant to
nonaccountable plans to income tax withholding. In addition, the legislative history provides
authority to alter the relevant employment tax rules. Pursuant to the regulatory authority granted
by Congress under the Family Support Act, these temporary regulations provide guidance regarding
the circumstances [*12] under which travel and other expense allowance arrangements are
subject to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act
(FUTA), the Railroad Retirement Tax Act (RRTA), the Railroad Unemployment Repayment Tax
(RURT) and the Collection of Income Tax at Source on Wages ("employment taxes"). These
regulations also provide guidance with regard to reporting of such amounts on Form W-2.
Delayed effective dates are provided for the changes in the employment tax regulations. The
changes in the employment tax regulations are effective for payments made under reimbursement
or other expense allowance arrangements that are received by an employee on or after July 1,
1990, with respect to expenses paid or incurred on or after July 1, 1990. For reimbursements or
other expense allowance payments made before July 1, 1990, or made with respect to expenses
paid or incurred before July 1, 1990, the rules in existing regulations will apply. Hence, for payments
made under reimbursement or other expense allowance arrangements before July 1, 1990, no
withholding or employment tax liability will attach with respect to amounts paid specifically-either as
advances or reimbursements-for [*13] traveling or other bona fide ordinary and necessary
expenses incurred or reasonably expected to be incurred in the business of the employer. Of course,
as under existing regulations, such expenses must be identified either by making a separate
payment or by specifically identifying the separate amounts if both wages and expense allowances
are combined in a single payment.
A delayed effective date is not provided for the amendments to the reporting requirements under
section 6041. The reporting requirements are effective for payments made under reimbursement or
other expense allowance arrangements on or after January 1, 1989, with respect to expenses paid
or incurred on or after January 1, 1989. However, for payments made before January 1, 1990, no
reporting is required if the payor has made a reasonable, good faith effort to comply with the
requirements of section 62 (c). In general, compliance with the provisions of prior section 1.6041-3
(i) of the Income Tax Regulations will indicate such reasonable good faith effort to comply with the
requirements of section 62 (c). Under those regulations, reporting on Form W-2 was not required if
the employee was required to account and did so [*14] account to the employer for such
expenses. See Rev. Rul. 80-62, 1980-1 C.B. 63, as modified, and Rev. Rul. 84-127, 1984-2 C.B.
246. A payor must, however, report payments made before January 1, 1990, if an arrangement
(other than a per diem or mileage type arrangement) does not require the employee to substantiate
expenses or to return excess amounts.
Payments Under Accountable Plans
If an arrangement meets all the requirements of the regulations, the amounts paid under the
arrangement are excluded from the employee's gross income, are not required to be reported on the
employee's Form W-2, and are exempt from withholding and payment of employment taxes (FICA,
FUTA, RRTA, RURT, and income tax). If an arrangement meets the requirements of the regulations,
but an employee fails to return amounts in excess of amounts substantiated, only the amounts not
in excess of the substantiated expenses are excluded from the employee's gross income, are not
required to be reported on the employee's Form W-2, and are exempt from withholding and
payment of employment taxes (FICA, FUTA, RRTA, RURT, and income tax).
Payments Under Nonaccountable Plans

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If an arrangement does not meet one or more of the requirements [*15] of the regulations, all
payments under the arrangement are included in the employee's gross income, are reported as
wages on Form W-2, and are wages for purposes of withholding and payment of employment taxes.
If an arrangement meets the requirements of the regulations, but an employee fails to return
amounts in excess of amounts substantiated, such excess is included in the employee's gross
income, is reported as wages on Form W-2, and is wages for purposes of withholding and payment
of employment taxes. Employee business expenses that exceed the amount of the reimbursements
that are excluded from the employee's gross income are not allowable as a deduction in computing
adjusted gross income. Rather, such employee business expenses are deductible by the employee in
computing taxable income only if the employee itemizes deductions, and only to the extent that the
total of such expenses and other miscellaneous itemized deductions exceeds two percent of the
taxpayer's adjusted gross income.
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 [*16] 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, the notice of proposed rulemaking for the regulations was submitted to the Administrator of
the Small Business Administration for comment on their impact on small business.

Adoption of Amendments to the Regulations
Accordingly, 26 CFR Parts 1, 31, and 602 are amended as follows:

PART 1-[AMENDED]
Paragraph 1. The authority for Part 1 is amended by adding the following citations:

Authority: 26 U.S.C. 7805
Secs. 1.62-1T and 1.62-2T also issued
under 26 U.S.C. 62
Sec. 1.6041-3 also issued under 26 U.S.C. 62.

Par. 2. Section 1.62-1T is amended by revising paragraph (c) (2) and by inserting a new
sentence before the first sentence of paragraph (f), to read:

§ 1.62-1T Adjusted gross income (temporary).

(c) Deductions allowable in computing adjusted gross income.

;

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(2) Deductions allowable under part VI, subchapter B, chapter 1 of the Code,
(section 161 and following) that consist [*17] of expenses paid or incurred
by the taxpayer in connection with the performance of services as an
employee under an express reimbursement or other expense allowance
arrangement (as defined in paragraph (f) of this section or § 1.62-2T,
whichever is applicable) with his or her employer;

(f) Reimbursement or other expense allowance arrangement. This paragraph
(f) applies to expenses paid or incurred in taxable years beginning before
January 1, 1989. ;

Par. 3. Section 1.62-2T is added immediately following 1.62-1T to read as follows:

§ 1.62-2T Reimbursements and other expense allowance
arrangements (Temporary).
(a) Table of contents. The contents of this section are as follows:

(a) Table of contents.
(b) Scope.
(c) Reimbursement or other expense allowance arrangement.

(1) Defined.
(2) Accountable plans.

(i) In general.
(ii) Special rule for failure to return excess.

(3) Nonaccountable plans.

(i) In general.

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(ii) Special rule for failure to return excess.

(4) Treatment of payments under accountable plans.
(5) Treatment of payments under nonaccountable
plans.

(d) Business connection.
(e) Substantiation.

(1) In general.
(2) Expenses governed by section 274 (d).
(3) Expenses not governed by section 274 (d).

(f) Returning [*18] amounts in excess of expenses.

(1) In general.
(2) Per diem or mileage allowances.

(g) Reasonable period.

(1) In general.
(2) Safe harbors.

(i) Fixed date method.
(ii) Periodic payment method.

(h) Timing of withholding.
(i) Application.

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(j) Cross references.
(k) Effective date.

(b) Scope. For purposes of determining "adjusted gross income," section 62
(a) (2) (A) allows an employee a deduction for expenses allowed by Part VI
(section 161 and following), subchapter B, chapter 1 of the Code, paid by
the employee, in connection with the performance of services as an
employee, under a reimbursement or other expense allowance arrangement
with a payor (the employer, its agent, or a third party). Section 62 (c)
provides that an arrangement will not be treated as a reimbursement or
other expense allowance arrangement for purposes of section 62 (a) (2) (A)
if (1) such arrangement does not require the employee to substantiate the
expenses covered by the arrangement to the payor, or (2) such
arrangement provides the employee the right to retain any amount in excess
of the substantiated expenses covered under the arrangement. This section
prescribes rules relating to the requirements of section 62 (c).
(c) Reimbursement [*19] or other expense allowance arrangement-(1)
Defined. For purposes of §§ 1.62-1T and 1.62-2T, the phrase
"reimbursement or other expense allowance arrangement" means an
arrangement that meets the requirements of paragraphs (d) (business
connection), (e) (substantiation), and (f) (returning amounts in excess of
expenses) of this section. A payor may have more than one arrangement
with respect to a particular employee, depending on the facts and
circumstances.
(2) Accountable plans-(i) In general. Except as provided in paragraph (c) (2)
(ii) of this section, if an arrangement meets the requirements of paragraphs
(d), (e), and (f) of this section, all amounts paid under the arrangement are
treated as paid under an "accountable plan."
(ii) Special rule for failure to return excess. If an arrangement meets the
requirements of paragraphs (d), (e), and (f) of this section, but the
employee fails to return, within a reasonable period of time, any amount in
excess of the amount of the expenses substantiated in accordance with
paragraph (e), only the amounts paid under the arrangement that are not in
excess of the substantiated expenses are treated as paid under an
accountable plan.
(3) Nonaccountable [*20] plans-(i) In general. If an arrangement does not
satisfy one or more of the requirements of paragraphs (d), (e), or (f) of this
section, all amounts paid under the arrangement are treated as paid under a
"nonaccountable plan."
(ii) Special rule for failure to return excess. If an arrangement meets the
requirements of paragraphs (d), (e), and (f) of this section, but the
employee fails to return, within a reasonable period of time, any amount in
excess of the amount of the expenses substantiated in accordance with
paragraph (e), the amounts paid under the arrangement that are in excess
of the substantiated expenses are treated as paid under a nonaccountable
plan.
(4) Treatment of payments under accountable plans. Amounts treated as

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paid under an accountable plan are excluded from the employee's gross
income, are not required to be reported on the employee's Form W-2, and
are exempt from the withholding and payment of employment taxes
(Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act
(FUTA), Railroad Retirement Tax Act (RRTA), Railroad Unemployment
Repayment Tax (RURT), and income tax). See paragraph (j) of this § 1.622T for cross references.
(5) Treatment of payments [*21] under nonaccountable plans. Amounts
treated as paid under a nonaccountable plan are included in the employee's
gross income, must be reported to the employee on Form W-2, and are
subject to withholding and payment of employment taxes (FICA, FUTA,
RRTA, RURT, and income tax). Expenses attributable to amounts included in
the employee's gross income may be deducted, provided the employee can
substantiate the full amount of his or her expenses (i.e., the amount of the
expenses, if any, the reimbursement for which is treated as paid under an
accountable plan as well as those for which the employee is claiming the
deduction) in accordance with § 1.274-5T or § 1.162-17, but only as a
miscellaneous itemized deduction subject to the limitations applicable to
such expenses (e.g., the 80-percent limitation on meal and entertainment
expenses provided in section 274 (n) and the 2-percent floor provided in
section 67).
(d) Business connection. An arrangement meets the requirements of this
paragraph (d) if it provides advances, allowances (including per diem
allowances, allowances for meals and incidental expenses, and mileage
allowances), or reimbursements for business expenses that are allowable
[*22] as deductions by Part VI (section 161 and the following), subchapter B, chapter 1 of the Code, and that are paid or incurred by the
employee in connection with the performance of services as an employee.
The payment may be actually received from the employer, its agent, or a
third party for whom the employee performs a service as an employee of the
employer, and may include amounts charged directly or indirectly to the
payor through credit card systems or otherwise. In addition, if both wages
and the reimbursement or other expense allowance are combined in a single
payment, the reimbursement or other expense allowance must be identified
either by making a separate payment or by specifically identifying the
amount of the reimbursement or other expense allowance.
(e) Substantiation-(1) In general. An arrangement meets the requirements
of this paragraph (e) if it requires each business expense to be substantiated
to the payor in accordance with paragraph (e) (2) or (e) (3) of this section,
whichever is applicable, within a reasonable period of time. See § 1.274-5T
or § 1.162-17.
(2) Expenses governed by section 274 (d). An arrangement that reimburses
travel, entertainment, use of a passenger [*23] automobile or other listed
property, or other business expenses governed by section 274 (d) meets the
requirements of this paragraph (e) (2) if information sufficient to satisfy the
substantiation requirements of section 274 (d) and the regulations
thereunder is submitted to the payor. See § 1.274-5T. Under section 274
(d), information sufficient to substantiate the requisite elements of each
expenditure or use must be submitted to the payor. For example, with
respect to travel away from home, § 1.274-5T (b) (2) requires that
information sufficient to substantiate the amount, time, place, and business
purpose of the expense must be submitted to the payor. Similarly, with
respect to use of a passenger automobile or other listed property, § 1.2745T (b) (6) requires that information sufficient to substantiate the amount,
time, use, and business purpose of the expense must be submitted to the

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payor. See § 1.274-5T (g), however, which grants the Commissioner
authority to prescribe rules permitting the amount of certain expenses to be
deemed substantiated to the payor (in lieu of substantiating the actual
amount of such expenses) where an arrangement provides for a
reimbursement, a per [*24] diem allowance, or a mileage allowance for
travel away from home or transportation expenses. See also § 1.274-5T (j),
which grants the Commissioner the authority to establish a method under
which a taxpayer may elect to use a specified amount for meals while
traveling away from home in lieu of substantiating the actual cost of meals.
Substantiation of the amount of a business expense in accordance with rules
prescribed pursuant to the authority granted by § 1.274-5T (g) or § 1.2745T (j) will be treated as substantiation of the amount of such expense for
purposes of this section.
(3) Expenses not governed by section 274 (d). An arrangement that
reimburses business expenses not governed by section 274 (d) meets the
requirements of this paragraph (e) (3) if information is submitted to the
payor sufficient to enable the payor to identify the specific nature of each
expense and to conclude that the expense is attributable to the payer's
business activities. Therefore, each of the elements of an expenditure or use
must be substantiated to the payor. It is not sufficient if an employee merely
aggregates expenses into broad categories (such as "travel") or reports
individual expenses through [*25] the use of vague, nondescriptive terms
(such as "miscellaneous business expenses"). See § 1.162-17 (b).
(f) Returning amounts in excess of expenses-(I) In general. Except as
provided in paragraph (f) (2) of this section, an arrangement meets the
requirements of this paragraph (f) if it requires the employee to return to
the payor within a reasonable period of time any amount paid under the
arrangement in excess of the expenses substantiated in accordance with
paragraph (e) of this section. The determination of whether an arrangement
requires an employee to return amounts in excess of substantiated expenses
will depend on the facts and circumstances. An arrangement whereby money
is advanced to an employee to defray expenses will be treated as satisfying
the requirements of this paragraph (f) only if the amount of money
advanced is reasonably calculated not to exceed the amount of anticipated
expenditures, the advance of money is made on a day within a reasonable
period of the day that the anticipated expenditures are paid or incurred, and
any amounts in excess of the expenses substantiated in accordance with
paragraph (e) are required to be re turned to the payor within a reasonable
[*26] period of time after the advance is received.
(2) Per diem or mileage allowances. The Commissioner may, in his
discretion, prescribe rules in pronouncements of general applicability under
which a reimbursement or other expense allowance arrangement that
provides per diem allowances providing for ordinary and necessary expenses
of traveling away from home (exclusive of transportation costs to and from
destination) or mileage allowances providing for ordinary and necessary
expenses of local travel and transportation while traveling away from home
will be treated as satisfying the requirements of this paragraph (f), even
though the arrangement does not require the employee to return the portion
of such an allowance that exceeds the amount of the employee's expenses
deemed substantiated pursuant to rules prescribed under section 274 (d),
provided the allowance is reasonably calculated not to exceed the amount of
the employee's expenses or anticipated expenses and the employee is
required to return to the payor within a reasonable period of time any
portion of such allowance which relates to days or miles of travel not
substantiated in accordance with paragraph (e) of this section.

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(g) Reasonable [*27] period-(1) In general. The determination of a
reasonable period of time will depend on the facts and circumstances.
(2) Safe harbors-(i) Fixed date method. An advance made within 30 days of
when an expense is paid or incurred, an expense substantiated to the payor
within 60 days after it is paid or incurred, or an amount returned to the
payor within 120 days after an expense is paid or incurred will be treated as
having occurred within a reasonable period of time.
(ii) Periodic statement method. If a payor provides employees with periodic
statements (no less frequently than quarterly) stating the amount, if any,
paid under the arrangement in excess of the expenses the employee has
substantiated in accordance with paragraph (e) of this section, and
requesting the employee to substantiate any additional business expenses
that have not yet been substantiated (whether or not such expenses relate
to the expenses with respect to which the original advance was paid) and/or
to return any amounts remaining unsubstantiated within 120 days of the
statement, an expense substantiated or an amount returned within that
period will be treated as being substantiated or returned within a reasonable
period [*28] of time.
(h) Timing of withholding. If the expenses covered under an arrangement
are not substantiated to the payor in accordance with paragraph (e) of this
section within a reasonable period of time or if any amounts in excess of the
substantiated expenses are not returned to the payor in accordance with
paragraph (f) of this section within a reasonable period of time, the amount
which is treated as paid under a nonaccountable plan under paragraph (c)
(3) of this section is subject to withholding and payment of employment
taxes no later than the first payroll period following the end of the
reasonable period. A payor may treat any amount not substantiated or
returned within the periods specified in paragraph (g) (2) of this section as
not substantiated or returned within a reasonable period of time. See
paragraph (j) of this § 1.62-2T for cross references.
(i) Application. The requirements of paragraphs (d) (business connection),
(e) (substantiation), and (f) (returning amounts in excess of expenses) of
this section will be applied on an employee-by-employee basis. Thus, for
example, the failure by one employee to substantiate expenses under an
arrangement in accordance with paragraph [*29] (e), will not cause
amounts paid to other employees to be treated as paid under a
nonaccountable plan.
(j) Cross references. For employment tax regulations relating to
reimbursement and expense allowance arrangements, see §§ 31.3121 (a)-1
(h), 31.3231 (e)-1 (a) (3) (iv), 31.3306 (b)-1-(h), and 31.3401 (a)-(1) (b)
(2), which apply to payments made under reimbursement or other expense
allowance arrangements received by an employee on or after July 1, 1990,
with respect to expenses paid or incurred on or after July 1, 1990. For
reporting requirements, see § 1.6041-3 (i), which generally applies to
payments made under reimbursement or other expense allowance
arrangements received by an employee on or after January 1, 1989 with
respect to expenses paid or incurred on or after January 1, 1989.
(k) Effective date. This section applies to payments made under
reimbursement or other expense allowance arrangements received by an
employee in taxable years of the employee beginning on or after January 1,
1989, with respect to expenses paid or incurred in taxable years beginning
on or after January 1, 1989.

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Par. 4. In § 1.162-17, a new paragraph (e) (3) is added, to read as follows:

§ 1.162-17 Reporting and substantiation of certain business
expenses of employees.
[*30]
(e) Applicability.
(3) For taxable years beginning on or after January 1, 1989, the provisions
of this section are superseded by the regulations under section 62 (c) to the
extent this section is inconsistent with those regulations. See § 1.62-2T.

Par. 5. Paragraph (b) of section 1.162-25T is amended by removing the first sentence
and adding in its place three new sentences to read as follows:

§ 1.162-25T Deductions with respect to noncash fringe benefits
(temporary).

(b) Employee. If an employer provides the use of a vehicle (as defined in §
1.61-21 (e) (2)) to an employee as a noncash fringe benefit and includes the
entire value of the benefit in an 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 [*31] 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. ;

Par. 6. Paragraph (g) of § 1.274-5T is revised by adding the words "in pronouncements
of general applicability" immediately following the word "rules" in the first sentence,
effective upon publication.
Par. 7. In § 1.6041-3, paragraph (i) is revised to read as follows:

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§ 1.6041-3 Payments for which no return of information is required
under section 6041.

(i)-(1) In general. Payments made under reimbursement or other expense
allowance arrangements that meet the requirements of section 62 (c) of the
Code and § 1.62-2T, that do not exceed the amount of the expenses
substantiated (i.e., amounts which are treated as paid under an accountable
plan), and that are received by an employee on or after January 1, 1989,
with respect to expenses paid or incurred on or after January 1, 1989;
(2) Transition rule. Payments made under reimbursement or other expense
allowance arrangements that are received by an employee on or after
January 1, 1989, but prior to January 1, 1990, to the extent that the
employee [*32] is required to account (within the meaning of the term
"account" as set forth in § 1.162-17-(b) (4) or 1.274-5T (f) (4), whichever is
applicable) and does so account to the payor for such expenses, provided
the payor has made a reasonable, good faith effort to comply with the
requirements of section 62 (c). In general, compliance with the provisions of
this section, as in effect for payments made under reimbursement or other
expense allowance arrangements that were received by an employee before
January 1, 1989, with respect to expenses paid or incurred before January 1,
1989, will constitute such reasonable good faith compliance. In no event,
however, will reasonable good faith compliance exist if a payor fails to report
payments made under an arrangement (other than a per diem or mileage
allowance type arrangement) under which an employee is not required to
substantiate expenses paid or incurred or is not required to return amounts
in excess of the substantiated expenses;

PART 31-[AMENDED]
Par. 8. The authority for Part 31 is amended by adding the following citation:

Authority: 26 U.S.C. 7805
Secs. 31.3121 (a)-1, 31.3231 (e)-1,
31.3306 (b)-1, and 31.3401 (a)-1 also issued [*33] under 26 U.S.C. 62.

Par. 9. In § 31.3121 (a)-1, paragraph (h) is amended by adding a sentence at the end
to read as follows:

§ 31.3121 (0)-1 Wages.
(h)
For amounts that are received by an employee on or after July 1,
1990, with respect to expenses paid or incurred on or after July 1, 1990, see
§ 31.3121 (a)-2T.

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Par. 10. Section 31.3121 (a)-2T is added to read as follows:

§ 31.3121 (a)-2T Reimbursement and other expense allowance amounts-(a)
When excluded from wages. If a reimbursement or other expense allowance
arrangement meets the requirements of section 62 (c) of the Code and §
1.62-2T and the expenses are substantiated within a reasonable period of
time, payments made under the arrangement that do not exceed the
substantiated expenses are treated as paid under an accountable plan and
are not wages. In addition, if both wages and the reimbursement or other
expense allowance are combined in a single payment, the reimbursement or
other expense allowance must be identified either by making a separate
payment or by specifically identifying the amount of the reimbursement or
other expense allowance.
(b) When included in wages. If a reimbursement or other expense allowance
arrangement [*34] does not satisfy the requirements of section 62 (c) and
§ 1.62-2T (e.g., the arrangement does not require expenses to be
substantiated or require amounts in excess of the substantiated expenses to
be returned), all amounts paid under the arrangement are treated as paid
under a nonaccountable plan, are included in wages, and are subject to
withholding and payment of employment taxes when paid. If an
arrangement satisfies the requirements of section 62 (c) and § 1.62-2T, but
the expenses are not substantiated within a reasonable period of time or
amounts in excess of the substantiated expenses are not returned within a
reasonable period of time, the amount paid under the arrangement in excess
of the substantiated expenses is treated as paid under a nonaccountable
plan, is included in wages, and is subject to withholding and payment of
employment taxes no later than the first payroll period following the end of
the reasonable period.
(c) Effective date. This section applies to payments made under
reimbursement or other expense allowance arrangements received by an
employee on or after July 1, 1990, with respect to expenses paid or incurred
on or after July 1, 1990.

Par. 11. In § 31.3231 (e)-1, [*35] paragraph (a) (3) (iv) is amended by adding a
sentence at the end to read as follows:

§ 31.3231 (e)-1 Compensation.
(a)
(iv)
For amounts that are received by an employee on or after July 1,
1990, with respect to expenses paid or incurred on or after July 1, 1990, see
§ 31.3231 (e)-3T.

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Par. 12. Section 31.3231 (e)-3T is added to read as follows:

§ 31.3231 (e)-3T Reimbursement and other expense allowance amounts-(a)
When excluded from compensation. If a reimbursement or other expense
allowance arrangement meets the requirements of section 62 (c) of the
Code and § 1.62-2T and the expenses are substantiated within a reasonable
period of time, payments made under the arrangement that do not exceed
the substantiated expenses are treated as paid under an accountable plan
and are not compensation. In addition, if both wages and the reimbursement
or other expense allowance are combined in a single payment, the
reimbursement or other expense allowance must be identified either by
making a separate payment or by specifically identifying the amount of the
reimbursement or other expense allowance.
(b) When included in compensation. If a reimbursement or other expense
allowance arrangement does [*36] not satisfy the requirements of section
62 (c) and § 1.62-2T (e.g., the arrangement does not require expenses to
be substantiated or require amounts in excess of the substantiated expenses
to be returned), all amounts paid under the arrangement are treated as paid
under a nonaccountable plan, are included in compensation, and are subject
to withholding and payment of employment taxes when paid. If an
arrangement satisfies the requirements of section 62 (c) and § 1.62-2T, but
the expenses are not substantiated within a reasonable period of time or
amounts in excess of the substantiated expenses are not returned within a
reasonable period of time, the amount, paid under the arrangement in
excess of the substantiated expenses is treated as paid under a
nonaccountable plan, is included in compensation, and is subject to
withholding and payment of employment taxes no later than the first payroll
period following the end of the reasonable period.
(c) Effective date. This section applies to payments made under
reimbursement or other expense allowance arrangements received by an
employee on or after July 1, 1990, with respect to expenses paid or incurred
on or after July 1, 1990.

Par. 13. In [*37] § 31.3306 (b)-1, paragraph (h) is amended by adding a sentence at
the end to read as follows:

§ 31.3306 (b)-1 Wages.

(h)
For amounts that are received by an employee on or after July 1,
1990, with respect to expenses paid or incurred on or after July 1, 1990,
see§ 31.3306 (b)-2T.

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Par. 14. Section 31.3306 (b)-2T is added to read as follows:

§ 31.3306 (b)-2T Reimbursement and other expense allowance amounts-(a)
When excluded from wages. If a reimbursement or other expense allowance
arrangement meets the requirements of section 62 (c) of the Code and §
1.62-2T and the expenses are substantiated within a reasonable period of
time, payments made under the arrangement that do not exceed the
substantiated expenses are treated as paid under an accountable plan and
are not wages. In addition, if both wages and the reimbursement or other
expense allowance are combined in a single payment, the reimbursement or
other expense allowance must be identified either by making a separate
payment or by specifically identifying the amount of the reimbursement or
other expense allowance.
(b) When included in wages. If a reimbursement or other expense allowance
arrangement does not satisfy the [*38] requirements of section 62 (c) and
§ 1.62-2T (e.g., the arrangement does not require expenses to be
substantiated or require amounts in excess of the substantiated expenses to
be returned), all amounts paid under the arrangement are treated as paid
under a nonaccountable plan, are included in wages, and are subject to
withholding and payment of employment taxes when paid. If an
arrangement satisfies the requirements of section 62 (c) and § 1.62-2T, but
the expenses are not substantiated within a reasonable period of time or
amounts in excess of the substantiated expenses are not returned within a
reasonable period of time, the amount paid under the arrangement in excess
of the substantiated expenses is treated as paid under a nonaccountable
plan, is included in wages, and is subject to withholding and payment of
employment taxes no later than the first payroll period following the end of
the reasonable period.
(c) Effective date. This section applies to payments made under
reimbursement or other expense allowance arrangements received by an
employee on or after July 1, 1990, with respect to expenses paid or incurred
on or after July 1, 1990.

Par. 15. In § 31.3401 (a)-1, paragraph (b) [*39] (2) is amended by adding a
sentence at the end to read as follows:

§ 31.3401 (a)-1 Wages.

(b)
(2) Traveling and other expenses.
For amounts that are received by
an employee on or after July 1, 1990, with respect to expenses paid or
incurred on or after July 1, 1990, see § 31.3401 (a)-2T.

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Par. 16. Section 31.3401 (a)-2T is added to read as follows:

§ 31.3401 (a)-2T Reimbursements and other expense allowance amounts(a) When excluded from wages. If a reimbursement or other expense
allowance arrangement meets the requirements of section 62 (c) of the
Code and § 1.62-2T and the expenses are substantiated within a reasonable
period of time, payments made under the arrangement that do not exceed
the substantiated expenses are treated as paid under an accountable plan
and are not wages. In addition, if both wages and the reimbursement or
other expense allowance are combined in a single payment, the
reimbursement or other expense allowance must be identified either by
making a separate payment or by specifically identifying the amount of the
reimbursement or other expense allowance.
(b) When included in wages. If a reimbursement or other expense allowance
arrangement does not [*40] satisfy the requirements of section 62 (c) and
§ 1.62-2T (e.g., the arrangement does not require expenses to be
substantiated or require amounts in excess of the substantiated expenses to
be returned), all amounts paid under the arrangement are treated as paid
under a nonaccountable plan, are included in wages, and are subject to
withholding and payment of employment taxes when paid. If an
arrangement satisfies the requirements of section 62 (c) and § 1.62-2T, but
the expenses are not substantiated within a reasonable period of time or
amounts in excess of the substantiated expenses are not returned within a
reasonable period of time, the amount paid under the arrangement in excess
of the substantiated expenses is treated as paid under a nonaccountable
plan, is included in wages, and is subject to withholding and payment of
employment taxes no later than the first payroll period following the end of
the reasonable period.
(c) Withholding rate. Employers may add any payments made under
reimbursement or other expense allowance arrangements that are subject to
income tax withholding to the employee's regular wages for a payroll period
and compute withholding taxes on the total. Alternatively, [*41] the
employer may withhold income tax from the reimbursement or other
expense allowance at the flat 20-percent rate applicable to supplemental
wages, provided the employer withholds income tax from the employee's
regular wages and provided the reimbursement or allowance is paid
separately (or separately identified if wages and reimbursement amounts
are combined in a single payment). See § 31.3402 (g)-1 regarding
supplemental wage payments.
(d) Effective date. This section applies to payments made under
reimbursement or other expense allowance arrangements received by an
employee on or after July 1, 1990, with respect to expenses paid or incurred
on or after July 1, 1990.
PART 602-[AMENDED]

Par. 17. The authority for Part 602 continues to read as follows:

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26 U.S.C. 7805

Par. 18. Section 602.101 (c) is revised by inserting in the appropriate places in the table
" 1.62-2 … 1545-1148".

Fred T. Goldberg,
Commissioner of Internal Revenue.
Approved December 4, 1989.
Kenneth W. Gideon,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on December 7, 1989, 12:20 p.m., and published in the
issue of the Federal Register for December 12, 1989, 54 F.R. 51021)

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