but otherwise bona fide expenses related to the employer’s business (such as travel not
away from home), the payor will be treated as maintaining two arrangements—the
deductible business expenses will be treated as satisfying the business connection
requirement, and the nondeductible business expenses will be treated as paid under a
nonaccountable plan. The payment may be actually received from the employer, its
agent, or a third party for whom the employee performs services as an employee of the
employer. § 1.62-2(d)(1). Section 1.62-2(d)(3)(i) provides that the business connection
requirement will not be satisfied if the payor arranges to pay an amount to an employee
regardless of whether the employee incurs or is reasonably expected to incur bona fide
business expenses related to the employer’s business.
An arrangement for travel and entertainment expenses meets the substantiation
requirement of § 1.62-2(e)(1) if the arrangement requires each business expense to be
substantiated to the payor in accordance with paragraph (e)(2), within a reasonable
period of time. An arrangement for those expenses meets the substantiation
requirements if the employee makes an adequate accounting to the payor that satisfies
the substantiation requirements of § 274(d) and the regulations thereunder. § 1.62-
2(e)(2).
Section 274(d) disallows a deduction under § 162 for any expense for travel
away from home, including meals and lodging, or entertainment unless the taxpayer
substantiates by adequate records or by sufficient evidence the requisite elements of
each expenditure. For travel expenses, the taxpayer must establish the amount, time,
place, and business purpose of the expenditure. § 1.274-5T(b)(2). For business
entertainment expenses, the taxpayer must establish the amount, date (and possibly
duration of business discussion), place, business purpose, names and business
relationship of the persons entertained, all as set forth in more detail in § 1.274-5T(b)(3)
and (b)(4). Section 1.274-5T(c)(2)(i) provides that, to substantiate each element by
adequate records, the taxpayer must maintain: 1) an account book, diary, log,
statement of expense, trip sheets, or similar record; and 2) documentary evidence that,
in combination, are sufficient to establish each element of an expenditure. The account
book, diary, log, statement of expense, trip sheet, 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.” § 1.274- 5T(c)(2)(ii). 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 making the expenditure, the taxpayer has full
present knowledge of each element of the expenditure, such as the amount, time,
place, and business purpose. An expense account statement which is a transcription of
an account book, diary, log, or similar record prepared or maintained at or near the time
of the expenditure, is considered a record prepared or maintained at or near the time of
the expenditure if the expense account statement is submitted by an employee to his
employer in the regular course of good business practice. § 1.274- 5T(c)(2)(ii)(A). An
employee must use adequate records to make an adequate accounting to substantiate
expenses to the payor. § 1.274-5(f)(4)(i).