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Publication 17
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28. Car Expenses and Other Employee Business ExpensesImportant ChangeStandard mileage rate. The standard mileage rate for the cost of operating your car in 2002 is 36½ cents a mile for all business miles. Car expenses and use of the standard mileage rate are explained under Transportation Expenses, later. Special depreciation allowance. Generally, new cars bought and placed in service in 2002 qualify for a special depreciation allowance. The special allowance is a depreciation deduction equal to 30% of the adjusted basis of the car. The special depreciation allowance can be claimed for cars used more than 50% in a qualified business use. See Special Depreciation Allowance in Publication 463. Depreciation limits on cars. If you claim the special depreciation allowance, the limit on the 2002 depreciation deduction for a car (including any section 179 deduction) is increased to $7,660. For cars that do not qualify for (or for which you choose not to claim) the special depreciation allowance, the limit remains $3,060. See Depreciation Limits in Publication 463. Exception for electric cars. If you claim the special depreciation allowance for an electric car, the limit on the 2002 depreciation deduction (including any section 179 deduction) is increased to $23,080. For electric cars that do not qualify for (or for which you choose not to claim) the special depreciation allowance, the limit remains $9,180. See Exceptions for clean-fuel cars in Publication 463. Important RemindersClaiming the special depreciation allowance for 2001. If you filed your 2001 calendar year return before June 1, 2002, and did not claim the new special depreciation allowance for a qualified car, you can claim it by filing an amended return on Form 1040X, Amended U.S. Individual Income Tax Return, by April 15, 2003. At the top of the Form 1040X, print Filed pursuant to Revenue Procedure 2002-33. If you are an employee, attach Form 2106, Employee Business Expenses. If you are self-employed, attach Form 4562, Depreciation and Amortization. Or, you can claim the special depreciation allowance by filing Form 3115, Application for Change in Accounting Method, with your 2002 return. For details, see Revenue Procedure 2002-33. Standard meal allowance. The standard meal allowance (also referred to as the limit on meals and incidental expenses (M&IE rate)) for most small localities in the United States is $30. However, the standard meal allowance is higher for most major cities and many other localities in the continental United States. See Publication 1542, Per Diem Rates. These rates (allowances/limits) are also listed in Appendix A of Chapter 41, Part 301 of the Code of Federal Regulations. If you have a computer, you can find them on the Internet at www.policyworks.gov/perdiem. Click on 2002 Domestic Per Diem Rates. Use of the standard meal allowance is explained under What Travel Expenses Are Deductible, later. Meal expenses when subject to hours of service limits. Generally, you can deduct only 50% of your business-related meal expenses while traveling away from your tax home for business purposes. You can deduct a higher percentage if the meals take place during or incident to any period subject to the Department of Transportation's hours of service limits. (These limits apply to certain workers who are under certain federal regulations.) The percentage is 65% for 2002. See Exceptions to the 50% limit under 50% Limit, later. Limits that apply to employee deductions. If you are an employee, deduct your work-related expenses discussed in this chapter as a miscellaneous itemized deduction on Schedule A (Form 1040). Generally, the amount of miscellaneous itemized deductions you can deduct is limited to the amount that is more than 2% of your adjusted gross income. It may be further limited if your adjusted gross income is more than $137,300 ($68,650 if you are married filing separately). For more information, see chapter 22 and the instructions for Schedule A (Form 1040). IntroductionYou may be able to deduct the ordinary and necessary business-related expenses you have for:
An ordinary expense is one that is common and accepted in your field of trade, business, or profession. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required to be considered necessary. This chapter explains:
Who does not need to use this chapter. If you are an employee, you will not need to read this chapter if all of the following are true.
If you meet these four conditions, there is no need to show the expenses or the reimbursements on your return. See Reimbursements, later, if you would like more information on reimbursements and accounting to your employer.
Useful ItemsYou may want to see: Publication
Form (and Instructions)
Travel ExpensesIf you temporarily travel away from your tax home, you can use this section to determine if you have deductible travel expenses. This section defines travel expenses, tax home, temporary assignment, and the standard meal allowance. It also discusses the rules for travel inside and outside the United States and deductible convention expenses. Travel expenses defined. For tax purposes, travel expenses are the ordinary and necessary expenses (defined earlier) of traveling away from home for your business, profession, or job. You will find examples of deductible travel expenses in Table 28-1. Traveling away from home. You are traveling away from home if:
This rest requirement is not satisfied by merely napping in your car. You do not have to be away from your tax home for a whole day or from dusk to dawn as long as your relief from duty is long enough to get necessary sleep or rest. Example 1. You are a railroad conductor. You leave your home terminal on a regularly scheduled round-trip run between two cities and return home 16 hours later. During the run, you have 6 hours off at your turnaround point where you eat two meals and rent a hotel room to get necessary sleep before starting the return trip. You are considered to be away from home. Example 2. You are a truck driver. You leave your terminal and return to it later the same day. You get an hour off at your turnaround point to eat. Because you are not off to get necessary sleep and the brief time off is not an adequate rest period, you are not traveling away from home. Members of the Armed Forces. If you are a member of the U.S. Armed Forces on a permanent duty assignment overseas, you are not traveling away from home. You cannot deduct your expenses for meals and lodging. You cannot deduct these expenses even if you have to maintain a home in the United States for your family members who are not allowed to accompany you overseas. If you are transferred from one permanent duty station to another, you may have deductible moving expenses, which are explained in chapter 19. A naval officer assigned to permanent duty aboard a ship that has regular eating and living facilities has a tax home aboard ship for travel expense purposes. Tax HomeTo determine whether you are traveling away from home, you must first determine the location of your tax home. Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home. It includes the entire city or general area in which your business or work is located. If you have more than one regular place of business, your tax home is your main place of business. See Main place of business or work, later. If you do not have a regular or a main place of business because of the nature of your work, then your tax home may be the place where you regularly live. See No main place of business or work, later. If you do not have a regular place of business or post of duty and there is no place where you regularly live, you are considered a transient (an itinerant) and your tax home is wherever you work. As a transient, you cannot claim a travel expense deduction because you are never considered to be traveling away from home. Main place of business or work. If you have more than one place of work, consider the following when determining which one is your main place of business or work.
Example. You live in Cincinnati where you have a seasonal job for 8 months each year and earn $25,000. You work the other 4 months in Miami, also at a seasonal job, and earn $9,000. Cincinnati is your main place of work because you spend most of your time there and earn most of your income there. No main place of business or work. You may have a tax home even if you do not have a regular or main place of work. Your tax home may be the home where you regularly live. Factors used to determine tax home. If you do not have a regular or main place of business or work, use the following three factors to determine where your tax home is.
If you satisfy all three factors, your tax home is the home where you regularly live. If you satisfy only two factors, you may have a tax home depending on all the facts and circumstances. If you satisfy only one factor, you are a transient; your tax home is wherever you work and you cannot deduct travel expenses. Example. You are single and live in Boston in an apartment you rent. You have worked for your employer in Boston for a number of years. Your employer enrolls you in a 12-month executive training program. You do not expect to return to work in Boston after you complete your training. During your training, you do not do any work in Boston. Instead, you receive classroom and on-the-job training throughout the United States. You keep your apartment in Boston and return to it frequently. You use your apartment to conduct your personal business. You also keep up your community contacts in Boston. When you complete your training, you are transferred to Los Angeles. You do not satisfy factor (1) because you did not work in Boston. You satisfy factor (2) because you had duplicate living expenses. You also satisfy factor (3) because you did not abandon your apartment in Boston as your main home, you kept your community contacts, and you frequently returned to live in your apartment. You have a tax home in Boston. Travel to family home. If you (and your family) do not live at your tax home, you cannot deduct the cost of traveling between your tax home and your family home. You also cannot deduct the cost of meals and lodging while at your tax home. See Example 1 that follows. If you are working temporarily in the same city where you and your family live, you may be considered as traveling away from home. See Example 2, below. Example 1. You are a truck driver and you and your family live in Tucson. You are employed by a trucking firm that has its terminal in Phoenix. At the end of your long runs, you return to your home terminal in Phoenix and spend one night there before returning home. You cannot deduct any expenses you have for meals and lodging in Phoenix or the cost of traveling from Phoenix to Tucson. This is because Phoenix is your tax home. Example 2. Your family home is in Pittsburgh, where you work 12 weeks a year. The rest of the year you work for the same employer in Baltimore. In Baltimore, you eat in restaurants and sleep in a rooming house. Your salary is the same whether you are in Pittsburgh or Baltimore. Because you spend most of your working time and earn most of your salary in Baltimore, that city is your tax home. You cannot deduct any expenses you have for meals and lodging there. However, when you return to work in Pittsburgh, you are away from your tax home even though you stay at your family home. You can deduct the cost of your round trip between Baltimore and Pittsburgh. You can also deduct your part of your family's living expenses for meals and lodging while you are living and working in Pittsburgh. Temporary Assignment
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| IF you have expenses for: | THEN you can deduct the costs of: |
| Transportation | Travel by airplane, train, bus, or car between your home and your business destination. If you were provided with a ticket or you are riding free as a result of a frequent traveler or similar program, your cost is zero. If you travel by ship, see Luxury Water Travel and Cruise ships (under Conventions) in Publication 463 for additional rules and limits. |
| Taxi, commuter bus, and airport limousine | Fares for these and other
types of transportation that take you between:
|
| Baggage and shipping | Sending baggage and sample or display material between your regular and temporary work locations. |
| Car | Operating and maintaining your car when traveling away from home on business. You can deduct actual expenses or the standard mileage rate as well as business-related tolls and parking. If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses. |
| Lodging and meals | Your lodging and meals if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Meals include amounts spent for food, beverages, taxes, and related tips. See Meals for additional rules and limits. |
| Cleaning | Dry cleaning and laundry. |
| Telephone | Business calls while on your business trip. This includes business communication by fax machine or other communication devices. |
| Tips | Tips you pay for any expenses in this chart. |
| Other | Other similar ordinary and necessary expenses related to your business travel. These expenses might include transportation to or from a business meal, public stenographer's fees, computer rental fees, and operating and maintaining a house trailer. |
Table 28-1 summarizes travel expenses you may be able to deduct. You may have other deductible travel expenses that are not covered there, depending on the facts and your circumstances.
When you travel
away from home on business, you should keep records of all the expenses you have and any
advances you receive from your employer. You can use a log, diary, notebook, or any other
written record to keep track of your expenses. The types of expenses you need to record,
along with supporting documentation, are described in Table 28-2 later.
Separating costs. If you have one expense that includes the costs of meals, entertainment, and other services (such as lodging or transportation), you must allocate that expense between the cost of meals and entertainment and the cost of other services. You must have a reasonable basis for making this allocation. For example, you must allocate your expenses if a hotel includes one or more meals in its room charge.
Travel expenses for another individual. If a spouse, dependent, or other individual goes with you (or your employee) on a business trip or to a business convention, you generally cannot deduct his or her travel expenses.
Employee. You can deduct the travel expenses of someone who goes with you if that person:
Business associate. If a business associate travels with you and meets the conditions in (2) and (3) above, you can deduct the travel expenses you have for that person. A business associate is someone with whom you could reasonably expect to actively conduct business. A business associate can be a current or prospective (likely to become) customer, client, supplier, employee, agent, partner, or professional advisor.
Bona fide business purpose. A bona fide business purpose exists if you can prove a real business purpose for the individual's presence. Incidental services, such as typing notes or assisting in entertaining customers, are not enough to make the expenses deductible.
Example. Jerry drives to Chicago on business and takes his wife, Linda, with him. Linda is not Jerry's employee. Linda occasionally types notes, performs similar services, and accompanies Jerry to luncheons and dinners. The performance of these services does not establish that her presence on the trip is necessary to the conduct of Jerry's business. Her expenses are not deductible.
Jerry pays $115 a day for a double room. A single room costs $90 a day. He can deduct the total cost of driving his car to and from Chicago, but only $90 a day for his hotel room. If he uses public transportation, he can deduct only his fare.
You can deduct the cost of meals in either of the following two situations.
Business-related entertainment is discussed under Entertainment Expenses, later. The following discussion deals only with meals that are not business-related entertainment.
Lavish or extravagant. You cannot deduct expenses for meals that are lavish or extravagant. An expense is not considered lavish or extravagant if it is reasonable based on the facts and circumstances. Expenses will not be disallowed merely because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts.
50% limit on meals. You can figure your meal expenses using either of the following two methods.
Both of these methods are explained below. But, regardless of the method you use, you generally can deduct only 50% of the unreimbursed cost of your meals.
If you are reimbursed for the cost of your meals, how you apply the 50% limit depends on whether your employer's reimbursement plan was accountable or nonaccountable. If you are not reimbursed, the 50% limit applies whether the unreimbursed meal expense is for business travel or business entertainment. The 50% limit is explained later under Entertainment Expenses. Accountable and nonaccountable plans are discussed later under Reimbursements.
Actual cost. You can use the actual cost of your meals to figure the amount of your expense before reimbursement and application of the 50% deduction limit. If you use this method, you must keep records of your actual cost.
Standard meal allowance. Generally, you can use the standard meal allowance method as an alternative to the actual cost method. It allows you to use a set amount for your daily meals and incidental expenses (M&IE), instead of keeping records of your actual costs. The set amount varies depending on where and when you travel. In this chapter, standard meal allowance refers to the federal rate for M&IE, discussed later under Amount of standard meal allowance. If you use the standard meal allowance, you still must keep records to prove the time, place, and business purpose of your travel. See Recordkeeping, later.
Incidental expenses. These include, but are not limited to, your costs for the following items.
Incidental expenses do not include taxicab fares, lodging taxes, or the costs of telegrams or telephone calls.
Federal
employees should refer to the federal travel regulations at www.policyworks.gov/ftr
for changes affecting their claims for reimbursement of these expenses.
50% limit may apply. If you use this method for meal expenses and you are not reimbursed or you are reimbursed under a nonaccountable plan, you can generally deduct only 50% of the standard meal allowance. If you are reimbursed under an accountable plan and you are deducting amounts that are more than your reimbursements, you can deduct only 50% of the excess amount. The 50% limit is explained later under Entertainment Expenses. Accountable and nonaccountable plans are discussed later under Reimbursements.
There is no
optional standard lodging amount similar to the standard meal allowance. Your allowable
lodging expense deduction is your actual cost.
Who can use the standard meal allowance. You can use the standard meal allowance whether you are an employee or self-employed, and whether or not you are reimbursed for your traveling expenses.
Who cannot use the standard meal allowance. You cannot use the standard meal allowance if you are related to your employer as defined next.
Related to employer. You are related to your employer if:
You may be considered to indirectly own stock, for purposes of (2), if you have an interest in a corporation, partnership, estate, or trust that owns the stock or if a member of your family or your partner owns the stock.
Use of the standard meal allowance for other travel. You can use the standard meal allowance to figure your meal expenses when you travel in connection with investment and other income-producing property. You can also use it to figure your meal expenses when you travel for qualifying educational purposes. You cannot use the standard meal allowance to figure the cost of your meals when you travel for medical or charitable purposes.
Amount of standard meal allowance. The standard meal allowance is the federal M&IE rate. For travel in 2002, the rate is $30 a day for most small localities in the United States. Most major cities and many other localities in the United States are designated as high-cost areas, qualifying for higher standard meal allowances. Locations qualifying for rates of $34, $38, $42, or $46 a day are listed in Publication 1542.
You can also
find this information on the internet at www.policyworks.gov/perdiem. Click on 2002
Domestic Per Diem Rates for the period January 1, 2002 - September 30, 2002, and 2003
Domestic Per Diem Rates for the period October 1, 2002 - December 31, 2002.
If you travel to more than one location in one day, use the rate in effect for the area where you stop for sleep or rest. If you work in the transportation industry, however, see Special rate for transportation workers, later.
Standard meal allowance for areas outside the continental United States. The standard meal allowance rates do not apply to travel in Alaska, Hawaii, or any other locations outside the continental United States. The federal per diem rates for these locations are published monthly in the Maximum Travel Per Diem Allowances for Foreign Areas.
Your
employer may have these rates available, or you can purchase the publication from the:
Superintendent of Documents
U.S. Government Printing Office
P.O. Box 371954
Pittsburgh, PA 15250-7954
You can also order
it by calling the Government Printing Office at 1-202-512-1800 (not a toll-free number).
You can access foreign per diem rates at: www.state.gov/m/a/als/prdm.
Special rate for transportation workers. You can use a special standard meal allowance if you work in the transportation industry. You are in the transportation industry if your work:
If this applies to you, you can claim a $38 a day standard meal allowance ($42 for travel outside the continental United States).
Using the special rate for transportation workers eliminates the need for you to determine the standard meal allowance for every area where you stop for sleep or rest. If you choose to use the special rate for any trip, you must use the special rate (and not use the regular standard meal allowance rates) for all trips you take that year.
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If you meet
these conditions and your employer included reimbursements on your Form W-2 in error, ask
your employer for a corrected Form W-2.