[Federal Register Volume 78, Number 148 (Thursday, August 1, 2013)]
[Rules and Regulations]
[Pages 46502-46504]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-18559]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9625]
RIN 1545-BI83
Reimbursed Entertainment Expenses
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations regarding the
exception to the deduction limitations on certain expenditures paid or
incurred under reimbursement or other expense allowance arrangements.
These final regulations affect taxpayers that pay or receive advances,
allowances, or reimbursements under reimbursement or other expense
allowance arrangements and clarify the rules for these arrangements.
DATES: Effective Date: These regulations are effective on August 1,
2013.
Applicability Date: For date of applicability, see Sec. 1.274-
2(f)(2)(iv)(F).
FOR FURTHER INFORMATION CONTACT: Patrick Clinton, (202) 622-4930 (not a
toll free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains final regulations that amend the Income Tax
Regulations (26 CFR part 1) under section 274(e)(3) of the Internal
Revenue Code (Code). The regulations provide rules for the exception
under section 274(e)(3) to the section 274(a) and (n) deduction
limitations for certain expenditures paid or incurred under
reimbursement or other expense allowance arrangements. The final
regulations clarify the definition of reimbursement or other expense
allowance arrangements for purposes of section 274(a) and (n) and how
the deduction limitations apply to reimbursement arrangements between
more than two parties.
On August 1, 2012, a notice of proposed rulemaking (REG-137589-07)
was published in the Federal Register (77 FR 45520). One written
comment responding to the notice of proposed rulemaking was received.
No public hearing was requested or held. After consideration of the
comment, the regulations are adopted without substantive change by this
Treasury decision.
Summary of Comment and Explanation of Provisions
1. Reimbursement Arrangements of Payors
The proposed regulations would amend regulations that apply the
section 274(e)(3) exception to reimbursement and other expense
allowance arrangements involving employees. The proposed regulations
clarify that these rules apply to reimbursement or other expense
allowance arrangements between payors and employees. Under the proposed
regulations, a payor may be an employer, an agent of the employer, or a
third party.
The commentator suggested that the change in terminology is
confusing and that the final regulations either should retain the term
employer or further define the terms.
The regulations use the term payor to clarify that the rules
relating to reimbursement and other expense allowance arrangements with
employees do not require determining who is the common law employer.
The rules require, instead, identifying the party that bears the
expense. Thus, the regulations are not limited to employers but
encompass any party that reimburses an employee's expenses under a
reimbursement or other expense allowance arrangement. Accordingly, the
final regulations do not adopt this comment.
2. Arrangements Between Independent Contractors and Clients
The proposed regulations provide that, for a reimbursement or other
expense allowance arrangement involving persons that are not employees
(an independent contractor and a client or customer), the parties may
expressly identify the party subject to the section 274(a) and (n)
limitations. If the agreement does not specify a party, the limitations
apply to the client if the independent contractor accounts to the
client for (substantiates) the expenses, and to the independent
contractor if the independent contractor does not account to the
client. The commentator suggested that the language of section
274(e)(3) does not permit the parties to choose which party is subject
to the limitations.
Section 274(e)(3)(B) provides that taxpayers may identify the party
subject to the section 274(a) and (n) limitations by accounting or not
accounting for expenses and therefore contemplates identification of
the party subject to the limitations. The final regulations provide a
rule that gives taxpayers the flexibility contemplated under section
274(e) and is easily administrable for the IRS. Accordingly, the final
regulations do not adopt this comment.
Effective/Applicability Date
These regulations apply to expenses paid or incurred in taxable
years beginning after August 1, 2013. Taxpayers may apply these
regulations to expenses paid or incurred in taxable years beginning on
or before August 1, 2013 for which the period of limitation on credit
or refund under section 6511 has not expired.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866, as
supplemented by Executive Order 13563. Therefore, a regulatory
assessment is not required. It also has been determined that section
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations and, because the regulations do not
impose a collection of information on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, the notice of proposed rulemaking that
preceded these final regulations was submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small business, and no comments were received.
Drafting Information
The principal author of these final regulations is Patrick Clinton
of the Office of Associate Chief Counsel (Income Tax & Accounting).
However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
[[Page 46503]]
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding an
entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.274-2 also issued under 26 U.S.C. 274(o). * * *
0
Par. 2. Section 1.274-2 is amended by revising paragraph (f)(2)(iv) to
read as follows:
Sec. 1.274-2 Disallowance of deductions for certain expenses for
entertainment, amusement, recreation, or travel.
* * * * *
(f) * * *
(2) * * *
(iv) Reimbursed entertainment, food, or beverage expenses--(A)
Introduction. In the case of any expenditure for entertainment,
amusement, recreation, food, or beverages made by one person in
performing services for another person (whether or not the other person
is an employer) under a reimbursement or other expense allowance
arrangement, the limitations on deductions in paragraphs (a) through
(e) of this section and section 274(n)(1) apply either to the person
who makes the expenditure or to the person who actually bears the
expense, but not to both. If an expenditure of a type described in this
paragraph (f)(2)(iv) properly constitutes a dividend paid to a
shareholder, unreasonable compensation paid to an employee, a personal
expense, or other nondeductible expense, nothing in this exception
prevents disallowance of the expenditure to the taxpayer under other
provisions of the Code.
(B) Reimbursement arrangements involving employees. In the case of
an employee's expenditure for entertainment, amusement, recreation,
food, or beverages in performing services as an employee under a
reimbursement or other expense allowance arrangement with a payor (the
employer, its agent, or a third party), the limitations on deductions
in paragraphs (a) through (e) of this section and section 274(n)(1)
apply--
(1) To the employee to the extent the employer treats the
reimbursement or other payment of the expense on the employer's income
tax return as originally filed as compensation paid to the employee and
as wages to the employee for purposes of withholding under chapter 24
(relating to collection of income tax at source on wages); or
(2) To the payor to the extent the reimbursement or other payment
of the expense is not treated as compensation and wages paid to the
employee in the manner provided in paragraph (f)(2)(iv)(B)(1) of this
section (however, see paragraph (f)(2)(iv)(C) of this section if the
payor receives a payment from a third party that may be treated as a
reimbursement arrangement under that paragraph).
(C) Reimbursement arrangements involving persons that are not
employees. In the case of an expense for entertainment, amusement,
recreation, food, or beverages of a person who is not an employee
(referred to as an independent contractor) in performing services for
another person (a client or customer) under a reimbursement or other
expense allowance arrangement with the person, the limitations on
deductions in paragraphs (a) through (e) of this section and section
274(n)(1) apply to the party expressly identified in an agreement
between the parties as subject to the limitations. If an agreement
between the parties does not expressly identify the party subject to
the limitations, the limitations apply--
(1) To the independent contractor (which may be a payor described
in paragraph (f)(2)(iv)(B) of this section) to the extent the
independent contractor does not account to the client or customer
within the meaning of section 274(d) and the associated regulations; or
(2) To the client or customer if the independent contractor
accounts to the client or customer within the meaning of section 274(d)
and the associated regulations. See also Sec. 1.274-5.
(D) Reimbursement or other expense allowance arrangement. The term
reimbursement or other expense allowance arrangement means--
(1) For purposes of paragraph (f)(2)(iv)(B) of this section, an
arrangement under which an employee receives an advance, allowance, or
reimbursement from a payor (the employer, its agent, or a third party)
for expenses the employee pays or incurs; and
(2) For purposes of paragraph (f)(2)(iv)(C) of this section, an
arrangement under which an independent contractor receives an advance,
allowance, or reimbursement from a client or customer for expenses the
independent contractor pays or incurs if either--
(a) A written agreement between the parties expressly states that
the client or customer will reimburse the independent contractor for
expenses that are subject to the limitations on deductions in
paragraphs (a) through (e) of this section and section 274(n)(1); or
(b) A written agreement between the parties expressly identifies
the party subject to the limitations.
(E) Examples. The following examples illustrate the application of
this paragraph (f)(2)(iv).
Example 1. (i) Y, an employee, performs services under an
arrangement in which L, an employee leasing company, pays Y a per
diem allowance of $10x for each day that Y performs services for L's
client, C, while traveling away from home. The per diem allowance is
a reimbursement of travel expenses for food and beverages that Y
pays in performing services as an employee. L enters into a written
agreement with C under which C agrees to reimburse L for any
substantiated reimbursements for travel expenses, including meals,
that L pays to Y. The agreement does not expressly identify the
party that is subject to the deduction limitations. Y performs
services for C while traveling away from home for 10 days and
provides L with substantiation that satisfies the requirements of
section 274(d) of $100x of meal expenses incurred by Y while
traveling away from home. L pays Y $100x to reimburse those expenses
pursuant to their arrangement. L delivers a copy of Y's
substantiation to C. C pays L $300x, which includes $200x
compensation for services and $100x as reimbursement of L's payment
of Y's travel expenses for meals. Neither L nor C treats the $100x
paid to Y as compensation or wages.
(ii) Under paragraph (f)(2)(iv)(D)(1) of this section, Y and L
have established a reimbursement or other expense allowance
arrangement for purposes of paragraph (f)(2)(iv)(B) of this section.
Because the reimbursement payment is not treated as compensation and
wages paid to Y, under section 274(e)(3)(A) and paragraph
(f)(2)(iv)(B)(1) of this section, Y is not subject to the section
274 deduction limitations. Instead, under paragraph (f)(2)(iv)(B)(2)
of this section, L, the payor, is subject to the section 274
deduction limitations unless L can meet the requirements of section
274(e)(3)(B) and paragraph (f)(2)(iv)(C) of this section.
(iii) Because the agreement between L and C expressly states
that C will reimburse L for substantiated reimbursements for travel
expenses that L pays to Y, under paragraph (f)(2)(iv)(D)(2)(a) of
this section, L and C have established a reimbursement or other
expense allowance arrangement for purposes of paragraph
(f)(2)(iv)(C) of this section. L accounts to C for C's reimbursement
in the manner required by section 274(d) by delivering to C a copy
of the substantiation L received from Y. Therefore, under section
274(e)(3)(B) and paragraph (f)(2)(iv)(C)(2) of this section, C and
not L is subject to the section 274 deduction limitations.
Example 2. (i) The facts are the same as in Example 1 except
that, under the arrangements between Y and L and between L and C, Y
provides the substantiation of the expenses directly to C, and C
pays the per diem directly to Y.
(ii) Under paragraph (f)(2)(iv)(D)(1) of this section, Y and C
have established a reimbursement or other expense allowance
arrangement for purposes of paragraph (f)(2)(iv)(C) of this section.
Because Y substantiates directly to C and the
[[Page 46504]]
reimbursement payment was not treated as compensation and wages paid
to Y, under section 274(e)(3)(A) and paragraph (f)(2)(iv)(C)(1) of
this section Y is not subject to the section 274 deduction
limitations. Under paragraph (f)(2)(iv)(C)(2) of this section, C,
the payor, is subject to the section 274 deduction limitations.
Example 3. (i) The facts are the same as in Example 1, except
that the written agreement between L and C expressly provides that
the limitations of this section will apply to C.
(ii) Under paragraph (f)(2)(iv)(D)(2)(b) of this section, L and
C have established a reimbursement or other expense allowance
arrangement for purposes of paragraph (f)(2)(iv)(C) of this section.
Because the agreement provides that the 274 deduction limitations
apply to C, under section 274(e)(3)(B) and paragraph (f)(2)(iv)(C)
of this section, C and not L is subject to the section 274 deduction
limitations.
Example 4. (i) The facts are the same as in Example 1, except
that the agreement between L and C does not provide that C will
reimburse L for travel expenses.
(ii) The arrangement between L and C is not a reimbursement or
other expense allowance arrangement within the meaning of section
274(e)(3)(B) and paragraph (f)(2)(iv)(D)(2) of this section.
Therefore, even though L accounts to C for the expenses, L is
subject to the section 274 deduction limitations.
(F) Effective/applicability date. This paragraph (f)(2)(iv) applies
to expenses paid or incurred in taxable years beginning after August 1,
2013.
* * * * *
0
Par. 3. Section 1.274-8 is revised to read as follows:
Sec. 1.274-8 Effective/applicability date.
Except as provided in Sec. Sec. 1.274-2(a), 1.274-2(e), 1.274-
2(f)(2)(iv)(F), and 1.274-5, Sec. Sec. 1.274-1 through 1.274-7 apply
to taxable years ending after December 31, 1962.
Beth Tucker,
Deputy Commissioner for Services and Enforcement.
Approved: June 25, 2013.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2013-18559 Filed 7-31-13; 8:45 am]
BILLING CODE 4830-01-P