[Code of Federal Regulations]
[Title 26, Volume 1]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.274-5A]

[Page 728-737]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.274-5A  Substantiation requirements.

    (a) In general. No deduction shall be allowed for any expenditure 
with respect to:
    (1) Traveling away from home (including meals and lodging) 
deductible under section 162 or 212,
    (2) Any activity which is of a type generally considered to 
constitute entertainment, amusement, or recreation, or with respect to a 
facility used in connection with such an activity, including the items 
specified in section 274(e), or

[[Page 729]]

    (3) Gifts defined in section 274, unless the taxpayer substantiates 
such expenditure as provided in paragraph (c) of this section. This 
limitation supersedes with respect to any such expenditure the doctrine 
of Cohan v. Commissioner (C.C.A. 2d 1930) 39 F. 2d 540. The decision 
held that, where the evidence indicated a taxpayer incurred deductible 
travel or entertainment expense but the exact amount could not be 
determined, the court should make a close approximation and not disallow 
the deduction entirely. Section 274(d) contemplates that no deduction 
shall be allowed a taxpayer for such expenditures on the basis of such 
approximations or unsupported testimony of the taxpayer. For purposes of 
this section, the term entertainment means entertainment, amusement, or 
recreation, and use of a facility therefore; and the term expenditure 
includes expenses and items (including items such as losses and 
depreciation).
    (b) Elements of an expenditure--(1) In general. Section 274(d) and 
this section contemplate that no deduction shall be allowed for any 
expenditure for travel, entertainment, or a gift unless the taxpayer 
substantiates the following elements for each such expenditure:
    (i) Amount;
    (ii) Time and place of travel or entertainment (or use of a facility 
with respect to entertainment), or date and description of a gift;
    (iii) Business purpose; and
    (iv) Business relationship to the taxpayer of each person 
entertained, using an entertainment facility or receiving a gift.
    (2) Travel. The elements to be proved with respect to an expenditure 
for travel are:
    (i) Amount. Amount of each separate expenditure for traveling away 
from home, such as cost of transportation or lodging, except that the 
daily cost of the traveler's own breakfast, lunch, and dinner and of 
expenditures incidental to such travel may be aggregated, if set forth 
in reasonable categories, such as for meals, for gasoline and oil, and 
for taxi fares;
    (ii) Time. Dates of departure and return for each trip away from 
home, and number of days away from home spent on business;
    (iii) Place. Destinations or locality of travel, described by name 
of city or town or other similar designation; and
    (iv) Business purpose. Business reason for travel or nature of the 
business benefit derived or expected to be derived as a result of 
travel.
    (3) Entertainment in general. Elements to be proved with respect to 
an expenditure for entertainment are:
    (i) Amount. Amount of each separate expenditure for entertainment, 
except that such incidental items as taxi fares or telephone calls may 
be aggregated on a daily basis;
    (ii) Time. Date of entertainment;
    (iii) Place. Name, if any, address or location, and designation of 
type of entertainment, such as dinner or theater, if such information is 
not apparent from the designation of the place;
    (iv) Business purpose. Business reason for the entertainment or 
nature of business benefit derived or expected to be derived as a result 
of the entertainment and, except in the case of business meals described 
in section 274(e)(1), the nature of any business discussion or activity;
    (v) Business relationship. Occupation or other information relating 
to the person or persons entertained, including name, title, or other 
designation, sufficient to establish business relationship to the 
taxpayer.
    (4) Entertainment directly preceding or following a substantial and 
bona fide business discussion. If a taxpayer claims a deduction for 
entertainment directly preceding or following a substantial and bona 
fide business discussion on the ground that such entertainment was 
associated with the active conduct of the taxpayer's trade or business, 
the elements to be proved with respect to such expenditure, in addition 
to those enumerated in subparagraph (3)(i), (ii), (iii), and (v) of this 
paragraph, are:
    (i) Time. Date and duration of business discussion;
    (ii) Place. Place of business discussion;
    (iii) Business purpose. Nature of business discussion, and business 
reason for the entertainment or nature of business benefit derived or 
expected to be derived as the result of the entertainment;

[[Page 730]]

    (iv) Business relationship. Identification of those persons 
entertained who participated in the business discussion.
    (5) Gifts. Elements to be proved with respect to an expenditure for 
a gift are:
    (i) Amount. Cost of the gift to the taxpayer;
    (ii) Time. Date of the gift;
    (iii) Description. Description of the gift;
    (iv) Business purpose. Business reason for the gift or nature of 
business benefit derived or expected to be derived as a result of the 
gift; and
    (v) Business relationship. Occupation or other information relating 
to the recipient of the gift, including name, title, or other 
designation, sufficient to establish business relationship to the 
taxpayer.
    (c) Rules for substantiation--(1) In general. A taxpayer must 
substantiate each element of an expenditure (described in paragraph (b) 
of this section) by adequate records or by sufficient evidence 
corroborating his own statement except as otherwise provided in this 
section. Section 274(d) contemplates that a taxpayer will maintain and 
produce such substantiation as will constitute clear proof of an 
expenditure for travel, entertainment, or gifts referred to in section 
274. A record of the elements of an expenditure made at or near the time 
of the expenditure, supported by sufficient documentary evidence, has a 
high degree of credibility not present with respect to a statement 
prepared subsequent thereto when generally there is a lack of accurate 
recall. Thus, the corroborative evidence required to support a statement 
not made at or near the time of the expenditure must have a high degree 
of probative value to elevate such statement and evidence to the level 
of credibility reflected by a record made at or near the time of the 
expenditure supported by sufficient documentary evidence. The 
substantiation requirements of section 274(d) are designed to encourage 
taxpayers to maintain the records, together with documentary evidence, 
as provided in subparagraph (2) of this paragraph. To obtain a deduction 
for an expenditure for travel, entertainment, or gifts, a taxpayer must 
substantiate, in accordance with the provisions of this paragraph, each 
element of such an expenditure.
    (2) Substantiation by adequate records--(i) In general. To meet the 
``adequate records'' requirements of section 274(d), a taxpayer shall 
maintain an account book, diary, statement of expense or similar record 
(as provided in subdivision (ii) of this subparagraph) and documentary 
evidence (as provided in subdivision (iii) of this subparagraph) which, 
in combination, are sufficient to establish each element of an 
expenditure specified in paragraph (b) of this section. It is not 
necessary to record information in an account book, diary, statement of 
expense or similar record which duplicates information reflected on a 
receipt so long as such account book and receipt complement each other 
in an orderly manner.
    (ii) Account book, diary, etc. An account book, diary, statement of 
expense or similar record must be prepared or maintained in such manner 
that each recording of an element of an expenditure is made at or near 
the time of the expenditure.
    (a) Made at or near the time of the expenditure. For purposes of 
this section, the phrase made at or near the time of the expenditure 
means the elements of an expenditure are recorded at a time when, in 
relation to the making of an expenditure, the taxpayer has full present 
knowledge of each element of the expenditure, such as the amount, time, 
place and business purpose of the expenditure and business relationship 
to the taxpayer of any person entertained. An expense account statement 
which is a transcription of an account book, diary, or similar record 
prepared or maintained in accordance with the provisions of this 
subdivision shall be considered a record prepared or maintained in the 
manner prescribed in the preceding sentence if such expense account 
statement is submitted by an employee to his employer or by an 
independent contractor to his client or customer in the regular course 
of good business practice.
    (b) Substantiation of business purpose. In order to constitute an 
adequate record of business purpose within the

[[Page 731]]

meaning of section 274(d) and this subparagraph, a written statement of 
business purpose generally is required. However, the degree of 
substantiation necessary to establish business purpose will vary 
depending upon the facts and circumstances of each case. Where the 
business purpose of an expenditure is evident from the surrounding facts 
and circumstances, a written explanation of such business purpose will 
not be required. For example, in the case of a salesman calling on 
customers on an established sales route, a written explanation of the 
business purpose of such travel ordinarily will not be required. 
Similarly, in the case of a business meal described in section 
274(e)(1), if the business purpose of such meal is evident from the 
business relationship to the taxpayer of the persons entertained and 
other surrounding circumstances, a written explanation of such business 
purpose will not be required.
    (c) Confidential information. If any information relating to the 
elements of an expenditure, such as place, business purpose or business 
relationship, is of a confidential nature, such information need not be 
set forth in the account book, diary, statement of expense or similar 
record, provided such information is recorded at or near the time of the 
expenditure and is elsewhere available to the district director to 
substantiate such element of the expenditure.
    (iii) Documentary evidence. Documentary evidence, such as receipts, 
paid bills, or similar evidence sufficient to support an expenditure 
shall be required for:
    (a) Any expenditure for lodging while traveling away from home, and
    (b) Any other expenditure of $25 or more, except, for transportation 
charges, documentary evidence will not be required if not readily 
available.

Provided, however, that the Commissioner, in his discretion, may 
prescribe rules waiving such requirements in circumstances where he 
determines it is impracticable for such documentary evidence to be 
required. Ordinarily, documentary evidence will be considered adequate 
to support an expenditure if it includes sufficient information to 
establish the amount, date, place, and the essential character of the 
expenditure. For example, a hotel receipt is sufficient to support 
expenditures for business travel if it contains the following: name, 
location, date, and separate amounts for charges such as for lodging, 
meals, and telephone. Similarly, a restaurant receipt is sufficient to 
support an expenditure for a business meal if it contains the following: 
name and location of the restaurant, the date and amount of the 
expenditure, and, if a charge is made for an item other than meals and 
beverages, an indication that such is the case. A document may be 
indicative of only one (or part of one) element of an expenditure. Thus, 
a cancelled check, together with a bill from the payee, ordinarily would 
establish the element of cost. In contrast, a cancelled check drawn 
payable to a named payee would not by itself support a business 
expenditure without other evidence showing that the check was used for a 
certain business purpose.
    (iv) Retention of documentary evidence. The Commissioner may, in his 
discretion, prescribe rules under which an employer may dispose of 
documentary evidence submitted to him by employees who are required to, 
and do, make an adequate accounting to the employer (within the meaning 
of paragraph (e)(4) of this section) if the employer maintains adequate 
accounting procedures with respect to such employees (within the meaning 
of paragraph (e)(5) of this section).
    (v) Substantial compliance. If a taxpayer has not fully 
substantiated a particular element of an expenditure, but the taxpayer 
establishes to the satisfaction of the district director that he has 
substantially complied with the adequate records requirements of this 
subparagraph with respect to the expenditure, the taxpayer may be 
permitted to establish such element by evidence which the district 
director shall deem adequate.
    (3) Substantiation by other sufficient evidence. If a taxpayer fails 
to establish to the satisfaction of the district director that he has 
substantially complied with the ``adequate records'' requirements of 
subparagraph (2) of this paragraph with respect to an element of an 
expenditure, then, except as otherwise

[[Page 732]]

provided in this paragraph, the taxpayer must establish such element:
    (i) By his own statement, whether written or oral, containing 
specific information in detail as to such element; and
    (ii) By other corroborative evidence sufficient to establish such 
element.

If such element is the description of a gift, or the cost, time, place, 
or date of an expenditure, the corroborative evidence shall be direct 
evidence, such as a statement in writing or the oral testimony of 
persons entertained or other witness setting forth detailed information 
about such element, or the documentary evidence described in 
subparagraph (2) of this paragraph. If such element is either the 
business relationship to the taxpayer of persons entertained or the 
business purpose of an expenditure, the corroborative evidence may be 
circumstantial evidence.
    (4) Substantiation in exceptional circumstances. If a taxpayer 
establishes that, by reason of the inherent nature of the situation in 
which an expenditure was made:
    (i) He was unable to obtain evidence with respect to an element of 
the expenditure which conforms fully to the ``adequate records'' 
requirements of subparagraph (2) of this paragraph,
    (ii) He is unable to obtain evidence with respect to such element 
which conforms fully to the ``other sufficient evidence'' requirements 
of subparagraph (3) of this paragraph, and
    (iii) He has presented other evidence, with respect to such element, 
which possesses the highest degree of probative value possible under the 
circumstances, such other evidence shall be considered to satisfy the 
substantiation requirements of section 274(d) and this paragraph.
    (5) Loss of records due to circumstances beyond control of taxpayer. 
Where the taxpayer establishes that the failure to produce adequate 
records is due to the loss of such records through circumstances beyond 
the taxpayer's control, such as destruction by fire, flood, earthquake, 
or other casualty, the taxpayer shall have a right to substantiate a 
deduction by reasonable reconstruction of his expenditures.
    (6) Special rules--(i) Separate expenditure--(a) In general. For the 
purposes of this section, each separate payment by the taxpayer shall 
ordinarily be considered to constitute a separate expenditure. However, 
concurrent or repetitious expenses of a similar nature occurring during 
the course of a single event shall be considered a single expenditure. 
To illustrate the above rules, where a taxpayer entertains a business 
guest at dinner and thereafter at the theater, the payment for dinner 
shall be considered to constitute one expenditure and the payment for 
the tickets for the theater shall be considered to constitute a separate 
expenditure. Similarly, if during a day of business travel a taxpayer 
makes separate payments for breakfast, lunch, and dinner, he shall be 
considered to have made three separate expenditures. However, if during 
entertainment at a cocktail lounge the taxpayer pays separately for each 
serving of refreshments, the total amount expended for the refreshments 
will be treated as a single expenditure. A tip may be treated as a 
separate expenditure.
    (b) Aggregation. Except as otherwise provided in this section, the 
account book, diary, statement of expense, or similar record required by 
subparagraph (2)(ii) of this paragraph shall be maintained with respect 
to each separate expenditure and not with respect to aggregate amounts 
for two or more expenditures. Thus, each expenditure for such items as 
lodging and air or rail travel shall be recorded as a separate item and 
not aggregated. However, at the option of the taxpayer, amounts expended 
for breakfast, lunch, or dinner, may be aggregated. A tip or gratuity 
which is related to an underlying expense may be aggregated with such 
expense. For other provisions permitting recording of aggregate amounts 
in an account book, diary, statement of expense or similar record see 
paragraph (b)(2)(i) and (b)(3) of this section (relating to incidental 
costs of travel and entertainment).
    (ii) Allocation of expenditure. For purposes of this section, if a 
taxpayer has established the amount of an expenditure, but is unable to 
establish the portion of such amount which is attributable to each 
person participating in the event giving rise to the expenditure, such 
amount shall ordinarily be

[[Page 733]]

allocated to each participant on a pro rata basis, if such determination 
is material. Accordingly, the total number of persons for whom a travel 
or entertainment expenditure is incurred must be established in order to 
compute the portion of the expenditure allocable to each such person.
    (iii) Primary use of a facility. Section 274(a) (1)(B) and (2)(C) 
denies a deduction for any expenditure paid or incurred before January 
1, 1979, with respect to a facility, or paid or incurred at any time 
with respect to a club, used in connection with an entertainment 
activity unless the taxpayer establishes that the facility (including a 
club) was used primarily for the furtherance of his trade or business. A 
determination whether a facility before January 1, 1979, or a club at 
any time was used primarily for the futherance of the taxpayer's trade 
or business will depend upon the facts and circumstances of each case. 
In order to establish that a facility was used primarily for the 
furtherance of his trade or business, the taxpayer shall maintain 
records of the use of the facility, the cost of using the facility, 
mileage or its equivalent (if appropriate), and such other information 
as shall tend to establish such primary use. Such records of use shall 
contain:
    (a) For each use of the facility claimed to be in furtherance of the 
taxpayer's trade or business, the elements of an expenditure specified 
in paragraph (b) of this section, and
    (b) For each use of the facility not in furtherance of the 
taxpayer's trade or business, an appropriate description of such use, 
including cost, date, number of persons entertained, nature of 
entertainment and, if applicable, information such as mileage or its 
equivalent. A notation such as ``personal use'' or ``family use'' would, 
in the case of such use, be sufficient to describe the nature of 
entertainment.

If a taxpayer fails to maintain adequate records concerning a facility 
which is likely to serve the personal purposes of the taxpayer, it shall 
be presumed that the use of such facility was primarily personal.
    (iv) Additional information. In a case where it is necessary to 
obtain additional information, either:
    (a) To clarify information contained in records, statements, 
testimony, or documentary evidence submitted by a taxpayer under the 
provisions of paragraph (c)(2) or (c)(3) of this section, or
    (b) To establish the reliability or accuracy of such records, 
statements, testimony, or documentary evidence, the district director 
may, notwithstanding any other provision of this section, obtain such 
additional information as he determines necessary to properly implement 
the provisions of section 274 and the regulations thereunder by personal 
interview or otherwise.
    (7) Specific exceptions. Except as otherwise prescribed by the 
Commissioner, substantiation otherwise required by this paragraph is not 
required for:
    (i) Expenses described in section 274 (e)(2) relating to food and 
beverages for employees, section 274(e)(3) relating to expenses treated 
as compensation, section 274(e)(8) relating to items available to the 
public, and section 274(e)(9) relating to entertainment sold to 
customers, and
    (ii) Expenses described in section 274(e)(5) relating to 
recreational, etc., expenses for employees, except that a taxpayer shall 
keep such records or other evidence as shall establish that such 
expenses were for activities (or facilities used in connection 
therewith) primarily for the benefit of employees other than employees 
who are officers, shareholders or other owners (as defined in section 
274(e)(5)), or highly compensated employees.
    (d) Disclosure on returns. The Commissioner may, in his discretion, 
prescribe rules under which any taxpayer claiming a deduction for 
entertainment, gifts, or travel or any other person receiving advances, 
reimbursements, or allowances for such items, shall make disclosure on 
his tax return with respect to such items. The provisions of this 
paragraph shall apply notwithstanding the provisions of paragraph (e) of 
this section.
    (e) Reporting and substantiation of expenses of certain employees 
for travel, entertainment, and gifts--(1) In general. The purpose of 
this paragraph is to provide rules for reporting and substantiation of 
certain expenses paid or incurred by taxpayers in connection with

[[Page 734]]

the performance of services as employees. For purposes of this 
paragraph, the term business expenses means ordinary and necessary 
expenses for travel, entertainment, or gifts which are deductible under 
section 162, and the regulations thereunder, to the extent not 
disallowed by section 274(c). Thus, the term business expenses does not 
include personal, living or family expenses disallowed by section 262 or 
travel expenses disallowed by section 274(c), and advances, 
reimbursements, or allowances for such expenditures must be reported as 
income by the em ployee.
    (2) Reporting of expenses for which the employee is required to make 
an adequate accounting to his employer--(i) Reimbursements equal to 
expenses. For purposes of computing tax liability, an employee need not 
report on his tax return business expenses for travel, transportation, 
entertainment, gifts, and similar purposes, paid or incurred by him 
solely for the benefit of his employer for which he is required to, and 
does, make an adequate accounting to his employer (as defined in 
subparagraph (4) of this paragraph) and which are charged directly or 
indirectly to the employer (for example, through credit cards) or for 
which the employee is paid through advances, reimbursements, or 
otherwise, provided that the total amount of such advances, 
reimbursements, and charges is equal to such expenses.
    (ii) Reimbursements in excess of expenses. In case the total of the 
amounts charged directly or indirectly to the employer or received from 
the employer as advances, reimbursements, or otherwise, exceeds the 
business expenses paid or incurred by the employee and the employee is 
required to, and does, make an adequate accounting to his employer for 
such expenses, the employee must include such excess (including amounts 
received for expenditures not deductible by him) in income.
    (iii) Expense in excess of reimbursements. If an employee incurs 
deductible business expenses on behalf of his employer which exceed the 
total of the amounts charged directly or indirectly to the employer and 
received from the employer as advances, reimbursements, or otherwise, 
and the employee wishes to claim a deduction for such excess, he must:
    (a) Submit a statement as part of his tax return showing all of the 
information required by subparagraph (3) of this paragraph, and,
    (b) Maintain such records and supporting evidence as will 
substantiate each element of an expenditure (described in paragraph (b) 
of this section) in accordance with paragraph (c) of this section.
    (3) Reporting of expenses for which the employee is not required to 
make an adequate accounting to his employer. If the employee is not 
required to make an adequate accounting to his employer for his business 
expenses or, though required, fails to make an adequate accounting for 
such expenses, he must submit, as a part of his tax return, a statement 
showing the following information:
    (i) The total of all amounts received as advances or reimbursements 
from his employer, including amounts charged directly or indirectly to 
the employer through credit cards or otherwise; and
    (ii) The nature of his occupation, the number of days away from home 
on business, and the total amount of business expenses paid or incurred 
by him (including those charged directly or indirectly to the employer 
through credit cards or otherwise) broken down into such categories as 
transportation, meals and lodging while away from home overnight, 
entertainment, gifts, and other business expenses.

In addition, he must maintain such records and supporting evidence as 
will substantiate each element of an expenditure (described in paragraph 
(b) of this section) in accordance with paragraph (c) of this section.
    (4) Definition of an ``adequate accounting'' to the employer. For 
purposes of this paragraph an adequate accounting means the submission 
to the employer of an account book, diary, statement of expense, or 
similar record maintained by the employee in which the information as to 
each element of an expenditure (described in paragraph (b) of this 
section) is recorded at or near the time of the expenditure, together 
with supporting documentary evidence, in a manner which conforms to all 
the

[[Page 735]]

``adequate records'' requirements of paragraph (c)(2) of this section. 
An adequate accounting requires that the employee account for all 
amounts received from his employer during the taxable year as advances, 
reimbursements, or allowances (including those charged directly or 
indirectly to the employer through credit cards or otherwise) for 
travel, entertainment, and gifts. The methods of substantiation allowed 
under paragraph (c)(4) or (c)(5) of this section also will be considered 
to be an adequate accounting if the employer accepts an employee's 
substantiation and establishes that such substantiation meets the 
requirements of such paragraph (c)(4) or (c)(5). For purposes of an 
adequate accounting the method of substantiation allowed under paragraph 
(c)(3) of this section will not be permitted.
    (5) Substantiation of expenditures by certain employees. An employee 
who makes an adequate accounting to his employer within the meaning of 
this paragraph will not again be required to substantiate such expense 
account information except in the following cases:
    (i) An employee whose business expenses exceed the total of amounts 
charged to his employer and amounts received through advances, 
reimbursements or otherwise and who claims a deduction on his return for 
such excess;
    (ii) An employee who is related to his employer within the meaning 
of section 267(b) but for this purpose the percentage referred to in 
section 267(b)(2) shall be 10 percent; and
    (iii) Employees in cases where it is determined that the accounting 
procedures used by the employer for the reporting and substantiation of 
expenses by such employees are not adequate, or where it cannot be 
determined that such procedures are adequate. The district director will 
determine whether the employer's accounting procedures are adequate by 
considering the facts and circumstances of each case, including the use 
of proper internal controls. For example, an employer should require 
that an expense account must be verified and approved by a responsible 
person other than the person incurring such expenses. Accounting 
procedures will be considered inadequate to the extent that the employer 
does not require an adequate accounting from his employees as defined in 
subparagraph (4) of this paragraph, or does not maintain such 
substantiation. To the extent an employer fails to maintain adequate 
accounting procedures he will thereby obligate his employees to 
separately substantiate their expense account information.
    (f) Substantiation by reimbursement arrangements or per diem, 
mileage, and other traveling allowances. The Commissioner may, in his 
discretion, prescribe rules under which:
    (1) Reimbursement arrangements covering ordinary and necessary 
expenses of traveling away from home (exclusive of transportation 
expenses to and from destination),
    (2) Per diem allowances providing for ordinary and necessary 
expenses of traveling away from home (exclusive of transportation costs 
to and from destination), and
    (3) Mileage allowances providing for ordinary and necessary expenses 
of transportation while traveling away from home, will, if in accordance 
with reasonable business practice, be regarded as equivalent to 
substantiation by adequate records or other sufficient evidence for 
purposes of paragraph (c) of this section of the amount of such 
traveling expenses and as satisfying, with respect to the amount of such 
traveling expenses, the requirements of an adequate accounting to the 
employer for purposes of paragraph (e)(4) of this section. If the total 
travel allowance received exceeds the deductible traveling expenses paid 
or incurred by the employee, such excess must be reported as income on 
the employee's return. See paragraph (h) of this section relating to the 
substantiation of meal expenses while traveling.
    (g) Reporting and substantiation of certain reimbursements of 
persons other than employees--(1) In general. The purpose of this 
paragraph is to provide rules for the reporting and substantiation of 
certain expenses for travel, entertainment, and gifts paid or incurred 
by one person (hereinafter termed ``independent contractor'') in 
connection with services performed for another person other than an 
employer (hereinafter termed ``client or customer'')

[[Page 736]]

under a reimbursement or other expense allowance arrangement with such 
client or customer. For purposes of this paragraph, the term business 
expenses means ordinary and necessary expenses for travel, 
entertainment, or gifts which are deductible under section 162, and the 
regulations thereunder, to the extent not disallowed by section 274(c). 
Thus, the term business expenses does not include personal, living or 
family expenses disallowed by section 262 or travel expenses disallowed 
by section 274(c), and reimbursements for such expenditures must be 
reported as income by the independent contractor. For purposes of this 
paragraph, the term reimbursements means advances, allowances, or 
reimbursements received by an independent contractor for travel, 
entertainment, or gifts, in connection with the performance by him of 
services for his client or customer, under a reimbursement or other 
expense allowance arrangement with his client or customer, and includes 
amounts charged directly or indirectly to the client or customer through 
credit card systems or otherwise. See paragraph (h) of this section 
relating to the substantiation of meal expenses while traveling.
    (2) Substantiation by independent contractors. An independent 
contractor shall substantiate, with respect to his reimbursements, each 
element of an expenditure (described in paragraph (b) of this section) 
in accordance with the requirements of paragraph (c) of this section; 
and, to the extent he does not so substantiate, he shall include such 
reimbursements in income. An independent contractor shall so 
substantiate a reimbursement for entertainment regardless of whether he 
accounts (within the meaning of subparagraph (3) of this paragraph) for 
such entertainment.
    (3) Accounting to a client or customer under section 274(e)(4)(B). 
Section 274(e)(4)(B) provides that section 274(a) (relating to 
disallowance of expenses for entertainment) shall not apply to 
expenditures for entertainment for which an independent contractor has 
been reimbursed if the independent contractor accounts to his client or 
customer to the extent provided by section 274(d). For purposes of 
section 274(e)(4)(B), an independent contractor shall be considered to 
account to his client or customer for an expense paid or incurred under 
a reimbursement or other expense allowance arrangement with his client 
or customer if, with respect to such expense for entertainment, he 
submits to his client or customer adequate records or other sufficient 
evidence conforming to the requirements of paragraph (c) of this 
section.
    (4) Substantiation by client or customer. A client or customer shall 
not be required to substantiate, in accordance with the requirements of 
paragraph (c) of this section, reimbursements to an independent 
contractor for travel and gifts, or for entertainment unless the 
independent contractor has accounted to him (within the meaning of 
section 274(e)(4)(B) and subparagraph (3) of this paragraph) for such 
entertainment. If an independent contractor has so accounted to a client 
or customer for entertainment, the client or customer shall substantiate 
each element of the expenditure (as described in paragraph (b) of this 
section) in accordance with the requirements of paragraph (c) of this 
section.
    (h) Authority for an optional method of computing meal expenses 
while traveling. The Commissioner may establish a method under which a 
taxpayer may elect to use a specified amount or amounts for meals while 
traveling in lieu of substantiating the actual cost of meals. The 
taxpayer would not be relieved of substantiating the actual cost of 
other travel expenses as well as the time, place, and business purpose 
of the travel. See paragraph (b)(2) and (c) of this section.
    (i) Effective date--(1) In general. Section 274(d) and this section 
apply with respect to taxable years ending after December 31, 1962, but 
only with respect to period after that date.

[[Page 737]]

    (2) Certain meal expenses. Paragraph (h) of this section is 
effective for expenses paid or incurred after December 31, 1982.

[T.D. 6630, 27 FR 12931, Dec. 29, 1972, as amended by T.D. 7226, 37 FR 
26711, Dec. 15, 1972; T.D. 7909, 48 FR 40370, Sept. 7, 1983; 48 FR 
41017, Sept. 13, 1983; T.D. 8051, 50 FR 36576, Sept. 9, 1985. 
Redesignated by T.D. 8715, 62 FR 13990, Mar. 25, 1997; T.D. 8996, 67 FR 
35008, May 17, 2002]

          Terminal Railroad Corporations and Their Shareholders