Taxpayers Should Check Their W-2 Forms
for Business Travel Reimbursements

WASHINGTON - Some employees who received reimbursements for business travel may need to claim a deduction on their 1989 tax returns for reimbursement that did not need to be, but were, included in income on their Forms W-2.

The IRS said that taxpayers who should check their Form W-2 are likely to be those who report their expenses to their employer but who received reimbursement based on mileage and per diem rates higher than standard rates. Most taxpayers who make an accounting to their employer for their business travel expenses will not need to take a deduction because their reimbursements were not included with wages on their W-2 forms. This would include taxpayers who were reimbursed on a dollar-for-dollar basis. It also includes those who were reimbursed in amounts equal to or less than standard per diem and mileage rates.

Employees should check box 10 of their 1989 Form W-2 to see if amounts reported were greater than wages or salary. They may also check with their employer to determine if they are in an affected plan and, if so, if reimbursements were included in box 10 of their W-2. Where such reimbursements are included in box 10 of the W-2, the taxpayer should take a deduction on line 30 of the Form 1040. To do this, taxpayers should write "reimbursed expenses" on the dotted portion of line 30. The amount of the deduction is the lesser of the amount of reimbursement or the amount allowable according to standard per diem and mileage rates.

For 1989, the rules regarding the tax treatment of employee business expenses were changed so that reimbursements would not be reported as taxable income on forms W-2 under a plan that requires the employee to substantiate each business expense to the employer and requires the employee to return excess amounts to the employer. In turn, the employees would not take a deduction for those expenses.

Notice 90-14 outlining the conditions and procedures for claiming an adjustment on 1989 tax returns for unnecessary W-2 reporting of employee business expense reimbursements will appear on Internal Revenue Bulletin 1990-7, dated February 12, 1990.

NOTICE 90-14

PURPOSE

This notice provides guidance on how to claim an "above-the-line" deduction (an adjustment to income) for business expenses, such as travel and transportation expenses, if your employer has reported amounts on your Form W-2 that were permitted, but not required to be reported. This special guidance applies only if you were reimbursed for business expenses on a per diem or mileage basis for 1989.

BACKGROUND:

I. Who needs to make this adjustment?

a. In general. Some employees who receive reimbursements or other expense allowances from their employers in 1989 will have amounts reported in Box 10 (Wages, tips, other compensation) of their Forms W-2 even though the amounts were not required to be reported. This notice provides a procedure for an adjustment to income (commonly known as an "above-the-line" deduction) in such cases. This notice applies to you only if you have such overreported amounts in Box 10, and if your employer has reported in Box 10 all per diem or mileage reimbursements and allowances paid to you under the arrangement.

b. Most employees who were reimbursed for business expenses do not need to make this adjustment. Many employers reimburse their employees for their actual business expenses. Likewise, many employers reimburse their employees for business travel and transportation expenses using a per diem allowance that is less than or equal to the applicable Federal per diem or using a mileage allowance that is less than or equal to the standard mileage rate (25.5 cents per mile for 1989). Generally, those amounts will not appear in Box 10 of your W-2, and in such case you should disregard this notice entirely.

c. Who might need to make this adjustment to income? If you received per diem allowances for travel (e.g., a flat rate per day of travel to cover expenses) instead of being reimbursed for your actual expenses, you may need to make this adjustment because the entire amount of all those allowances may have been included in Box 10 under a special reporting rule available for employers in 1989. Also, if you were reimbursed for business use of your personal auto at a rate higher than the standard mileage rate of 25.5 cents per mile, you may have to make this adjustment because the entire amount may have been included in Box 10 under the 1989 special reporting rules. These special reporting rules were provided for employers for 1989 because specific guidelines on reporting these types of reimbursement were not available until December 12, 1989.

d. How do I know whether my employer overreported amounts in Box 10 and whether the amount in Box 10 includes all my reimbursements and allowances? You can make this determination either by checking your own records or by asking your employer. For example, compare your salary, pay stubs, and other payroll information against the amount shown in Box 10. If the only amount shown in Box 10 is your salary, then your employer already made the necessary adjustment to your income and you should disregard this notice. If you are not certain whether a reimbursement or other expense allowance has been included in Box 10 or whether all per diem and mileage reimbursements and allowances were included, you should check with your employer to determine whether any such amounts were included, and, if so, the amount that was included.

II. You are not eligible for this adjustment if your reimbursement or expense allowance arrangement is not an "accountable" plan.

a. How do I know whether my reimbursement or expense allowance arrangement is an "accountable" plan? A plan is accountable if:

1) it provides reimbursements for business expenses paid by you in connection with the performance of services for your employer;

2) it requires you to substantiate each business expense to your employer; and

3) it requires you to return to your employer any amount in excess of the substantiated expenses. Special rules for per diem and mileage allowance plans are described below. If a plan fails any of these three requirements, the reimbursement or allowance is included in your income and the expense does not qualify for an above-the-line deduction. Expenses incurred under a nonaccountable plan are deductible only as a miscellaneous itemized deduction. See Publication 17 for further instructions on the proper treatment of miscellaneous itemized deductions.

b. What is a per diem or mileage allowance plan? A per diem plan is a plan under which your business travel expenses for lodging, meals, and/or incidental items are reimbursed at a specified rate based on the period you were away from home (e.g., the number of days traveled) and you are not required to account for the actual amount of your expenses. A mileage allowance plan is a plan under which your automobile transportation expenses are reimbursed at a specified rate per mile.

c. What special rules apply to per diem and mileage allowance plans?

1) Substantiation. If you have actually provided substantiation to your employer of the time, place and business purpose of the travel reimbursed under a per diem or mileage allowance plan, you are treated as having substantiated an amount equal to the lesser of the amount of the reimbursement you received from your employer or the amount specified by the Internal Revenue Service for the days or miles you traveled whether or not you substantiate the actual dollar amount of your expenses to your employer. In the case of a per diem plan, the amount specified by the Internal Revenue Service is either the Federal per diem rate or the high-low rate. In the case of a mileage allowance, the amount specified by the Internal Revenue Service is the standard mileage rate. These Internal Revenue Service specified rates are described in paragraph III(b) below.

2) Return of Excess. A per diem or mileage allowance plan satisfies the return of excess requirement, even if the allowance exceeds the amount treated as substantiated, provided the allowance is reasonably calculated not to exceed your anticipated expenses and you are required to return any portion of such an allowance which relates to days or miles that you did not in fact travel.

d. What should I do if I do not know whether my plan is an accountable plan? If you are not certain whether your reimbursement or expense allowance plan is accountable or nonaccountable, you should ask your employer.

III. If I qualify for an above-the-line deduction, what is the amount of my deduction?

a. In general. The amount you may deduct above-the-line is the lesser of the reimbursement you received from your employer or the amount specified by the Internal Revenue Service for the days or miles traveled.

b. Internal Revenue Service-specified rates. In computing your above-the-line deduction, you may use any of the applicable Internal Revenue Service-specified rates, so long as you have the information (such as cities visited) to support the method. You may use only one per diem method for reimbursements paid by a particular employer in determining your deduction. The Internal Revenue Service-specified per diem and mileage rates are as follows:

1). Per diem reimbursement for lodging, meals and incidentals.

a) Federal per diem rate. The Federal per diem rate equals the sum of the Federal lodging expense rate and the Federal meal and incidental expense rate for the locality of travel for the period you are away from home. See Revenue Procedure 89-67, section 3.02. 1989-52 I.R.B. 17, for information regarding these rates. For 1989 only, if you do not have detailed records available to reconstruct and identify all the different localities to which you traveled, or you would have difficulty reconstructing these records, you may use the appropriate Federal per diem rate for travel for which you have records on location and $66 a day for travel to locations for which you do not have records. Alternatively, you may wish to choose the simplified approach under the high-low rate method discussed in paragraph B.

b) High-low rate. The "high-low" rate is $122 per day for any "high-cost locality" and $85 per day for any "low-cost locality" to which you traveled. For high-cost localities, the lodging amount is $88 and the meals amount is $34. For low-cost localities the lodging amount is $59 and the meals amount is $26. For 1989 only, if you do not have detailed records available to reconstruct and identify all the different localities to which you traveled on business for your employer or you have difficulty reconstructing these records, you may use the $85 low-cost locality rate per day for any day of travel for which you do not have records of the location to which you traveled.

2) Per diem reimbursement for meals and incidentals only. Federal meal and incidental (M&IE) rate. The Federal M&IE rate for the locality of travel (either $34 or $26 per day) for the period you were away from home. See Revenue Procedure 89-67, section 3.02, 1989-52 I.R.B. 17, for information on these rates. For 1989 only, if you do not have detailed records available to reconstruct and identify all the different localities to which you traveled on business for your employer or you have difficulty reconstructing these records, you may use the $26 locality rate per day for any day of travel for which you do not have records of the location to which you traveled.

3) Mileage allowances. The standard mileage rate for 1989 is 25.5 cents per mile.

IV. How do I deduct qualified amounts for 1989?

a. In general. If you had amounts included on your Form W-2 that were not required to be reported, the following instructions must be followed for 1989 because the Form 1040 no longer provides a specific line to deduct reimbursed employee business expenses above-the-line. To claim an above-the-line adjustment you must file Form 1040 and not Forms 1040A or 1040 EZ.

b. Special instructions for Form 1040. Determine the lesser of the amount of your business travel expenses under the rules described in paragraph III, that is the amount computed using the Internal Revenue Service-specified rate that you have selected or the amount actually reimbursed and reported in Box 10 of your Form W-2. Write this amount on the words, "Reimbursed Expenses" or "RE" in the dotted area to the left of the column on line 30 of the Form 1040. Include this amount in the total on line 30 (total adjustments to income) of Form 1040. These are the only employee business expenses that you may deduct above- the-line for 1989.

EXAMPLES:

The following examples illustrate the application of these rules to amounts received under accountable reimbursement or expense allowance plans.

Example 1: Per Diem Reimbursements Are Less Than Internal Revenue Service-Specified Rates. Employee A incurred travel expenses on a three day business trip to Rock Island, Illinois for her employer. The employer reimbursed employee A under a per diem allowance arrangement at the rate of $80 per day. The employer included the total of these travel allowances ($80x3- $240) in box 10 of employee A's Form W-2. To claim an above-the- line deduction, employee A should file Form 1040. Since this was a per diem allowance arrangement, A may calculate the amount of expenses using the Federal per diem rate of $76 per day or the high-low rate of $85 per day. Employee A chooses the high-low rate of $85 per day rate. The lesser of: a) the amount of the per diem allowance that was reported in box 10 of her Form W-2 ($240), and b) the amount of the business travel expense calculated under the method chosen by employee A (85 x 3 = $255) is $240. Employee A writes this amount ($240) and the words "Reimbursed Expenses" or "RE" in the dotted area to the left of the column on line 30 of the Form 1040. Employee A includes this amount in the total on line 30 (total adjustments to income) of Form 1040.

Example 2: Per Diem Reimbursements Are More Than Internal Revenue Service-Specified Rates. Employee B incurred travel expenses on several business trips for her employer covering a total of 20 days. The employer reimbursed employee B under a per diem allowance arrangement at the rate of $150 per day, and the employee did not retain records to substantiate actual expenses. The employer included the total of these travel allowances ($150x20=$3000) in box 10 of employee B's Form W-2. To claim an above-the-line deduction, employee B should file Form 1040. Because employee B does not have records of the localities to which she traveled, she chooses to use the high-low rate and applies the special $85 per day rate. The lesser of: a) the amount of the per diem allowance that was reported in box 10 of her Form W-2 ($3000), and b) the amount of the business travel expense calculated under the method chosen by employee B ($85x20=$1700) is $1700. Employee B writes this amount ($1700) and the words "Reimbursed Expenses" or "RE" in the dotted area to the left of the column on line 30 of the Form 1040. Employee B includes this amount in the total on line 30 (total adjustments to income) of Form 1040. Because B does not have adequate records to substantiate actual expenses in excess of $1700, she may not claim any additional deduction on Schedule A.

Example 3: Mileage Reimbursements Exceed the Standard Mileage Rate. Employee C used his personal automobile to drive 10,000 miles for business purposes in 1989. C's employer reimbursed C at the rate of 30 cents per mile for each business mile driven for a total of $3,000 (.30 x 10,000). The employer included the total automobile expense reimbursement ($3,000) in box 10 of employee C's Form W-2. To claim an above-the-line deduction, employee C should file Form 1040. The lesser of: a) the amount of mileage allowance that was reported in box 10 of his Form W-2 ($3,000), or b) the amount computed using the standard mileage rate (.255x10,000=$2,550) is $2,550. Employee C writes this amount ("$2,550") and the words, "Reimbursed Expenses" or "RE" in the dotted area to the left of the column on line 30 of the Form 1040. Employee C includes this amount in the total on line 30 (total adjustments to income) of Form 1040. If C has adequate records to substantiate actual expenses in excess of $2,550, he may claim an additional deduction on Schedule A.

High-Cost Locality Table

High-Cost Localities. The following localities are high- cost localities. All others are low-cost localities.

Key City                    County and other defined
location

California
     Death Valley           Inyo
     Los Angeles            Los Angeles, Kern, Orange, and
                            Ventura Counties,


Base, Naval                 Edwards Air Base

Weapons Center and Ordnance
Test Station,
                            China Lake
     Palm Springs           Riverside
     San Francisco          San Francisco
     Santa Barbara          Santa Barbara

Colorado
     Aspen                  Pitkin
     Vail                   Eagle

District of Columbia
     Washington, D.C.       The cities of Alexandria,
                            Falls Church, and 
                            Fairfax, & the counties 
                            of Arlington, Loudoun, & 
                            Fairfax in Virginia; & the 
                            counties of Montgomery & 
                            Prince Georges in Maryland.

Georgia
     Atlanta                Clayton, De Kalb, Fulton, and
                            Cobb

Illinois
     Chicago                Du Page, Cook, and Lake

Maryland
     Annapolis              Anne Arundel
     Columbia               Howard
     Ocean City             Worcester

Massachusetts
     Andover                Essex
     Boston                 Middlesex, Norfolk, and
                            Suffolk
     Martha's Vineyard/     Dukes and Nantucket
        Nantucket
        Plymouth            Plymouth

New Hampshire
     Conway                 Carroll

New Jersey
     Atlantic City          Atlantic
     Newark                 Bergen, Essex, Hudson,
                            Passaic, and Union
     Ocean City/Cape May    Cape May
     Princeton/Trenton      Mercer

New York
     New York City          The boroughs of Bronx, 
     			    Brooklyn, Manhattan, 
     			    Queens, and Staten
                            Island; Nassau and 
                            Suffolk Counties
     White Plains           Westchester

Pennsylvania
     Philadelphia           Philadelphia; city of Bala
                            Cynwyd in Montgomery County

Rhode Island
     Newport                Newport

South Carolina
     Hilton Head            Beaufort

Texas
     Dallas/Fort Worth      Dallas and Tarrant

ADDITIONAL INFORMATION:

For additional information on reimbursement and expense allowance arrangements see Revenue Procedures 89-66 and 89-67, 1989-52 I.R.B. 13, 17 AND section 1.62-2T of the Temporary regulations published in the Federal Register on December 12, 1989 (54 FR 51021).

RELIANCE

This document serves as an "administrative pronouncement" as that term is described in section 6662(d)(2)(B)(i) of the Internal Revenue Code, and may be relied upon to the same extent as a revenue ruling or revenue procedure. However, this notice is not applicable to any year after 1989.

DRAFTING INFORMATION

The principal author of this notice is Richard Pavel of the Office of the Assistant Chief Counsel (Employee Benefits and Exempt Organizations). For further information regarding this notice, contact Mr. Pavel on (202) 377-9372 (not a toll-free call).

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