Lodging, meal and incidental expenses
In a detailed Revenue Procedure, the IRS explains the rules under which the amount of ordinary and necessary business expenses of an employee for lodging, meal, and incidental expenses, or for meal and incidental expenses incurred while traveling away from home, are deemed to be substantiated under the Income Tax Regulations when the employer, its agent, or a third party provides a per diem allowance under a reimbursement or other expense allowance arrangement to pay for the expenses.

In addition, the Procedures provides

• an optional method for employees and self-employed individuals who pay or incur meal costs to use in computing the deductible costs of business meal and incidental expenses paid or incurred while traveling away from home
  
  
• an optional method for use in computing the deductible costs of incidental expenses paid or incurred while traveling away from home by employees and self-employed individuals who do not pay or incur meal costs and who are not reimbursed for the incidental expenses.

Use of a method described in the Procedure is not mandatory and a taxpayer may use actual allowable expenses if the taxpayer maintains adequate records or other sufficient evidence for proper substantiation.

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...back to 7 October 2004


Further information:
www.irs.gov/pub/irs-drop/rp-04-60.pdf

Provision of parking on or near the employer's premises
Where an employer offers parking facilities on or near the employer's premises and employees choose to make use of the parking in return for a reduction in their gross income, the compensation that is foregone is not subject to payroll taxes. The same applies if an employer unilaterally reduces an employee's cash compensation in order to provide the parking as a non-taxable benefit.

Also, if an employee incurs qualified parking expenses, the employer may reimburse those expenses if satisfied that they are genuine and the payment does not exceed the amount of the expenses. The payment to the employee is also not subject to payroll taxes.

Is it possible for both measures to apply to the same parking provision? In a written Ruling, the IRS has closed an abusive "double dip" tax arrangement whereby the payment foregone by the employee is treated as a payment of expenses that is then reimbursed by the employer.

The example given by the IRS is of an employee who receives a monthly wage of $1,500. The payroll calculation is as follows:

The employee agrees to take a reduction in salary of $100 in return for the parking. The employer then pays the employee an additional $79.75 as a purported reimbursement of parking expenses. The result is as follows:

The employee takes home the same net pay but has paid £20.25 less in payroll taxes and withholding.

The arrangement is abusive because an employer may only exclude a reimbursement for qualified parking expenses if those expenses were actually incurred by the employee. If an employee is given a choice between cash compensation and an employer-provided benefit, or if an employer unilaterally reduces an employee's cash compensation in order to provide a non-taxable benefit, the benefit is treated as being provided directly by the employer, not purchased by the employee. If it were treated as being purchased by the employee, it could not be excluded from the employee's gross pay.

As the cost of providing the parking is incurred by the employer, not the employee, no expense has been incurred by the employee and, as a result, the payment by the employer cannot be a reimbursement. Therefore, such a payment cannot be excluded from payroll taxes and withholding.

This Ruling does not affect regular arrangements for the provision of qualified parking benefits between employers and their employees.

The Ruling also applies to other double-dip arrangements involving attempts to exclude alleged reimbursements of the cost of non-taxable benefits which are provided by employers on a pre-tax basis.

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Further information:
www.ustreas.gov/press/releases/js1974.htm
www.irs.gov/pub/irs-drop/rr-04-98.pdf

Use of debit cards to provide qualified transportation fringes
In Notice 2004-46, the Treasury and the IRS are seeking information about how debit card technology works. Qualified transportation fringes include transportation in a commuter highway vehicle (vanpooling), any transit pass, and qualified parking that meet regulatory requirements. Qualified transportation fringes are excluded from the employee's gross income and from wages for purposes of employment tax.

The operation of the technology is directly relevant to answering a number of questions that arise when applying the qualified transportation fringe benefit regulations. For example, should a debit card be considered a voucher that may be exchanged exclusively for a transit pass? If so, should employers be barred from using cash reimbursement to provide transit passes to their employees as qualified transportation fringe benefits, even if vouchers are not otherwise readily available? If a debit card can be used to purchase more than one kind of fringe benefit, does an employer provide an advance or a reimbursement when it provides a debit card for use in purchasing various transportation benefits? Can a debit card system be established to keep amounts designated for different types of transit benefits separate to ensure that the statutory monthly limits applicable to the different types of benefits are not exceeded?

Submissions are requested by October 19, 2004

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Further information:
www.irs.gov/pub/irs-drop/n-04-46.pdf