What is IRS Publication 463: Travel, Entertainment, Gift, And Car Expenses

IRS Publication 463: Travel, Entertainment, Gift, and Car Expenses explains what expenses are deductible for an individual doing business on behalf of their employer. The document provides instructions for claiming a deduction and how an employee should handle any reimbursements received from their employer.

BREAKING DOWN IRS Publication 463: Travel, Entertainment, Gift, And Car Expenses

IRS Publication 463: Travel, Entertainment, Gift, and Car Expenses outlines the deductibility of certain business-related expenses and provides instructions for claiming these as deductions on an individual filer’s tax return.  Publication 463 is published by the U.S. Internal Revenue Service (IRS) and updated periodically on the IRS website. The document is divided into six chapters which cover travel, entertainment, gifts, transportation, recordkeeping and instructions for reporting expenses.

An individual incurring expenses in the course of their employment should first seek reimbursement from their employer. Publication 463 addresses those expenses for which the employee does not receive reimbursement from the employer. The document does not discuss an employer’s obligation to reimburse the employee for qualified expenses. It does, however, make clear that any reimbursements made prior to the individual filing their return, including per diem plans, be treated separately from normal income on a W-2 form.

Ordinary and Necessary Expenses in Publication 463

The deductions authorized by Publication 463 are for necessary and ordinary business expenses incurred by an individual taxpayer in the course of doing business for their employer. 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.  A company considering such expenses would need to differentiate between these expenses and those associated with the cost of goods sold (COGS) and capital expenses. A business might also need to differentiate these expenses from capital costs associated with launching the company or other long-term investments in that business.

An individual need only determine that the expenses were incurred as part of their employment. This sounds simple, but it can become less clear when the individual considers an expense that might go toward both personal benefit and serving an employer. Perhaps an employee owns and maintains a vehicle that they use for both personal and business purposes. Publication 463 instructs that individual to assign a percentage of the usage of that vehicle to each purpose and use that percentage to determine a dollar amount to be deducted. This is one of several instances where the publication leaves room for the taxpayer’s discretion in determining the nature of an expense. Another is in the definition of a gift to a customer. The taxpayer may take part in the gift, in the case of tickets to a sporting event, for instance. In such a case, the giver of the tickets is responsible for determining the extent to which their own ticket should be considered personal entertainment and which portion, if any, should be considered a gift to the customer.