Substantiation of Business ExpensesUse of Mileage Rates To Substantiate Automobile Expenses

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-122488-97]

RIN 1545-AV87

Substantiation of Business Expenses--Use of Mileage Rates To

Substantiate Automobile Expenses

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations relating to the

use of mileage rates to substantiate automobile business expenses. The

regulations affect taxpayers who deduct expenses, and payors who make

payments and employees who receive payments under reimbursement or

other expense allowance arrangements, for the business use of an

automobile.

DATES: Written or electronically generated comments and requests for a

public hearing must be received by December 30, 1998.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, contact

Edwin B. Cleverdon or Donna M. Crisalli, (202) 622-4920 (not a toll-

free number).

ADDRESSES: Send submissions to CC:DOM:CORP:R (REG-122488-97), room

5228, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,

Washington, DC 20044. In the alternative, submissions may be hand

delivered between the hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:R (REG-

122488-97), Courier's Desk, Internal Revenue Service, 1111 Constitution

Avenue NW., Washington, DC. Additionally, taxpayers may submit comments

electronically via INTERNET by selecting the ``Tax Regs'' option on the

IRS INTERNET site at: http://www.irs.ustreas.gov/prod/tax__regs/

comments.html.

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

Section 274(d) provides that a taxpayer is not allowed a deduction

or credit for certain expenses unless the expense is substantiated.

These substantiation requirements apply to the expenses of use of any

listed property

[[Page 52661]]

(defined in section 280F(d)(4)), which includes any passenger

automobile and any other property used as a means of transportation.

The Secretary may issue regulations that provide that some or all of

the substantiation requirements will not apply to expenses that do not

exceed a prescribed amount.

Section 1.274-5T(b)(6) sets forth the elements of an expenditure or

use, i.e., the amount, time, and business purpose, that are required to

be substantiated with respect to listed property. Section 1.274(d)-1

provides, in part, that the Commissioner may prescribe rules under

which mileage allowances reimbursing ordinary and necessary expenses of

local travel and transportation while traveling away from home will

satisfy the substantiation requirements of Sec. 1.274-5T(c), and the

requirements of an adequate accounting to the employer for purposes of

Sec. 1.274-5T(f)(4). However, Sec. 1.274(d)-1(a)(3) provides that such

mileage allowances are available only to the owner of a vehicle.

Proposed Sec. 1.274-5(g) applies these substantiation rules to

mileage allowances for business use of an automobile without the

limitation in Sec. 1.274(d)-1(a)(3) that a mileage allowance is

available only to the owner of a vehicle. Proposed Sec. 1.274-5(j)(1)

continues to authorize the Commissioner to establish a method for

computing meal expenses while traveling away from home (see current

Sec. 1.274-5T(j)), while Sec. 1.274-5(j)(2) authorizes the Commissioner

to establish a method under which a taxpayer may use mileage rates to

determine the amount of the ordinary and necessary business expenses of

using an automobile for local transportation and transportation to,

from, and at the destination while traveling away from home in lieu of

substantiating the actual costs. The mileage rate method may include

appropriate limitations and conditions in order to reflect more

accurately automobile expenses over the entire period of usage. The

taxpayer would not, however, be relieved of substantiating the amount

of each business use (i.e., the business mileage) and the time and

business purpose of each use. See Rev. Proc. 97-59 (1997-52 I.R.B. 24),

for rules for using the mileage rate method. This proposed Sec. 1.274-

5(g), (j), and (m) supplement Sec. 1.274-5(c) and (f) as proposed on

March 25, 1997, in the Federal Register (62 FR 14051). Conforming

changes to Sec. 1.62-2 are also proposed.

Special Analyses

It has been determined that this notice of proposed rulemaking is

not a significant regulatory action as defined in EO 12866. 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 Internal Revenue Code, this

notice of proposed rulemaking will be submitted to the Chief Counsel

for Advocacy of the Small Business Administration for comment on its

impact on small business.

Comments and Requests for a Public Hearing

Before adopting these proposed regulations as final regulations,

consideration will be given to any comments that are submitted timely

(and in the manner described in the ADDRESSES portion of this preamble)

to the IRS. All comments will be available for public inspection and

copying. A public hearing will be scheduled and held upon request by

any person who submits comments on the proposed rules. Notice of the

time and place for the hearing will be published in the Federal

Register.

Drafting Information

The principal authors of these proposed regulations are Edwin B.

Cleverdon and Donna M. Crisalli, Office of the Assistant Chief Counsel

(Income Tax and Accounting). However, personnel from other offices of

the IRS and Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

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

part as follows:

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

Par. 2. In Sec. 1.62-2, paragraph (e)(2) is revised to read as

follows:

Sec. 1.62-2 Reimbursement and other expense allowance arrangements.

* * * * *

(e) * * *

(2) Expenses governed by section 274(d). An arrangement that

reimburses travel, entertainment, use of a passenger 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

Sec. 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, Sec. 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, Sec. 1.274-5T(b)(6)

requires that information sufficient to substantiate the amount, time,

use, and business purpose of the expense must be submitted to the

payor. See Sec. 1.274-5(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) by means of per diem or mileage rates

for travel away from home or transportation expenses. See also

Sec. 1.274-5(j)(1), which grants the Commissioner the authority to

establish a method under which a taxpayer may use a specified amount

for meals while traveling away from home in lieu of substantiating the

actual cost of meals, and Sec. 1.274-5(j)(2), which grants the

Commissioner the authority to establish a method under which a taxpayer

may use mileage rates to determine the amount of the ordinary and

necessary expenses of using an automobile for local transportation and

transportation to, from, and at the destination while traveling away

from home in lieu of substantiating the actual costs. Substantiation of

the amount of a business expense in accordance with rules prescribed

pursuant to the authority granted by Sec. 1.274-5(g) or (j) will be

treated as substantiation of the amount of such expense for purposes of

this section.

* * * * *

Sec. 1.62-2T [Removed]

Par. 3. Section 1.62-2T is removed.

Par. 4. Section 1.274-5 is added to read as follows:

Sec. 1.274-5 Substantiation requirements.

(a) through (f) [Reserved]. For further guidance, see Sec. 1.274-

5T(a) through (f).

[[Page 52662]]

(g) Substantiation by reimbursement arrangements or per diem,

mileage, and other traveling allowances--(1) In general. The

Commissioner may, in his or her discretion, prescribe rules in

pronouncements of general applicability under which allowances for

expenses described in paragraph (g)(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 Sec. 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

Sec. 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 paragraph (j)(1) of

this section relating to the substantiation of meal expenses while

traveling away from home, and paragraph (j)(2) of this section relating

to the substantiation of expenses for the business use of an

automobile.

(2) Allowances for expenses described. An allowance for expenses is

described in this paragraph (g)(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 transportation and transportation to, from, and at

the destination while traveling away from home.

(3) Limitation. For expenses paid or incurred on or before December

31, 1997, a mileage allowance described in paragraph (g)(2)(iii) of

this section is available only to the owner of a vehicle.

(h) and (i) [Reserved]. For further guidance, see Sec. 1.274-5T(h)

and (i).

(j) Authority for optional methods of computing certain expenses--

(1) Meal expenses while traveling away from home. The Commissioner may

establish a method under which a taxpayer may use a specified amount or

amounts for meals while traveling away from home in lieu of

substantiating the actual cost of meals. The taxpayer would not be

relieved of the requirement to substantiate the actual cost of other

travel expenses as well as the time, place, and business purpose of the

travel. See Sec. 1.274-5T(b)(2) and (c).

(2) Use of mileage rates for automobile expenses. The Commissioner

may establish a method under which a taxpayer may use mileage rates to

determine the amount of the ordinary and necessary expenses of using an

automobile for local transportation and transportation to, from, and at

the destination while traveling away from home in lieu of

substantiating the actual costs. Such method may include appropriate

limitations and conditions in order to reflect more accurately

automobile expenses over the entire period of usage. The taxpayer would

not be relieved of the requirement to substantiate the amount of each

business use (i.e., the business mileage), or the time and business

purpose of each use. See Sec. 1.274-5T(b)(2) and (c).

(k) and (l) [Reserved]. For further guidance, see Sec. 1.274-5T(k)

and (l).

(m) Effective date. Paragraphs (g) and (j) of this section apply to

expenses paid or incurred after December 31, 1997.

Sec. 1.274-5T [Amended]

Par. 5. Paragraphs (g) and (j) of Sec. 1.274-5T are removed and

reserved.

Sec. 1.274(d)-1 [Amended]

Par. 6. Section 1.274(d)-1 is amended by removing paragraph (a)(3).

Sec. 1.274(d)-1T [Removed]

Par. 7. Section 1.274(d)-1T is removed.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

[FR Doc. 98-26227 Filed 9-30-98; 8:45 am]

BILLING CODE 4830-01-U