What Is IRS Publication 463: Travel, Entertainment, Gift, and Car Expenses?
IRS Publication 463: Travel, Entertainment, Gift, and Car Expenses explains the expenses associated with business activities that an individual taxpayer can deduct to reduce their overall taxable income. The document primarily focuses on the itemization of expenses for IRS Schedule A used by employees with wages reported on a W-2. It also pertains to Armed Forces reservists, qualified performing artists, fee-basis state or local government officials, and employees with disability impairment-related work expenses who file business expense deductions on Form 2106.
Publication 463 is not necessarily for partnerships and trusts. These business entities will typically file all business related expenses on a Schedule C and should refer to IRS Publication 535. Publication 463 does provide some guidance for self-employment expense reporting on Schedule C though Publication 535 is also a central resource. In general, there is some overlap on allowable individual business expense deductions for both employees and the self-employed though they report business expense deductions on two entirely different forms, Schedule A vs. Schedule C.
Understanding IRS Publication 463: Travel, Entertainment, Gift, and Car Expenses
IRS Publication 463 is published by the U.S. Internal Revenue Service (IRS) and updated periodically on the IRS website. It covers a vast amount of information pertaining to expense deductions. The deductions authorized by Publication 463 are for necessary and ordinary business expenses incurred by an individual taxpayer in the course of doing business. The IRS defines these as expenses that are both common in a particular industry and helpful to the practice of that business. These expenses do not have to be required for the conduct of that business. In general, an individual need only determine expenses that were incurred as part of a business activity and not expenses associated with personal use.
IRS Publication 463 is divided into six main chapters which include the following:
- Chapter 1: Travel
- Chapter 2: Meals and Entertainment
- Chapter 3: Gifts
- Chapter 4: Transportation
- Chapter 5: Recordkeeping
- Chapter 6: How to Report
The Tax Cuts and Jobs Act (TCJA) began to take force for tax year 2018 and will run through 2025. The TCJA made substantial changes in the area of Schedule A expenses, generally eliminating most Schedule A expense deductions. However, the TCJA integrated a Schedule A standard deduction of $12,000. The $12,000 standard deduction also eliminated the need for most taxpayers to itemize Schedule A deductions of any kind, including business expense deductions at all.
- IRS Publication 463 explains the expenses associated with business activities that an individual taxpayer can deduct to reduce their overall taxable income.
- Publication 463 primarily focuses on the itemization of expenses for IRS Schedule A used by employees with wages reported on a W-2.
- The TCJA significantly reduced the business expenses that can be itemized but provided a $12,000 Schedule A standard deduction.
An individual incurring expenses in the course of their employment will typically obtain the greatest advantage by first seeking reimbursement from their employer. This can help to eliminate any need for expense deduction considerations.
Publication 463 addresses expenses for which an employee does not receive reimbursement from an employer. If an employee receives reimbursement for expenses, it is not generally considered taxable income.
In most cases, travel expenses will be reimbursed by an employer. If travel expenses are not reimbursed, a taxpayer can generally only deduct business travel expenses associated with travel away from their tax home. Some of the most basic expenses that are deductible away from home include: transportation, lodging, and meals.
Meals and Entertainment
Meals and entertainment are defined separately. In general, any entertainment expenses paid for the purpose of entertainment, amusement, or recreation are nondeductible as a business expense. This includes any expenses for facilities, dues, and memberships.
Meals are generally deductible for up to 50% of the total cost. Meals should not be considered lavish or extravagant. Meals can be expenses at entertainment events if purchased separately.
Gifts can generally be deducted as an expense for up to $25 per gift. Gifts of entertainment cannot be deducted.
Taxpayers generally cannot deduct transportation expenses to a regular work location. Some deductions can apply for alternative work locations.
Expenses for a vehicle used for business will generally be calculated using either the standard mileage expensing method or actual cost expensing. The standard mileage method multiplies 54.5 cents per mile usage. The actual cost method includes all actual costs such as gas, oil, registration, repairs, and car payments.
W-2 employees generally cannot deduct vehicle expenses on a Schedule A. Therefore, alternatively seeking employer reimbursement agreements can be advantageous. Self-employed taxpayers can deduct vehicle expenses from gross income when calculating net income on a Schedule C.
Recordkeeping and Reporting
The IRS suggests that taxpayers keep detailed records of expense deductions. Taxpayers with W-2 wages will report wages on line 1 of the 1040. If a taxpayer has multiple W-2s the sum of W-2 wages are reported on line 1. Expense deductions associated with W-2 wages can be itemized on a Schedule A if greater than $12,000. If Schedule A expense deductions are not greater than $12,000, the taxpayer gets the standard deduction of $12,000. Schedule A standard or itemized deductions are reported on line 8 of the 1040 and reduce taxable income.
If a taxpayer is self-employed with 1099 wages, all 1099 wages are reported on Schedule C. Allowable business expenses pertaining to 1099 income are deducted to arrive at a net income which is reported on line 6 of the 1040. (For more on Schedule C business expenses also see Publication 535)
Disclaimer: Individuals should consult IRS Publication 463 or a tax professional for details pertaining to their own individual business deductions. This article provides general information that may or may not pertain to individual situations.