What Is IRS Publication 463 for 2023 About?

The IRS provides guidelines to help taxpayers accurately report expenses and deductions, with Publication 463 serving as a key resource for business-related travel, gift, and car expenses. This document outlines what qualifies as a deductible expense and how to properly track and report these costs to comply with tax laws.

Key Travel Expense Guidance

For a travel expense to be deductible, it must be ordinary and necessary for business. An ordinary expense is common in a particular industry, while a necessary expense is helpful and appropriate for conducting business. This includes costs like airfare, lodging, and meals, but only if they are directly related to business activities and not excessive.

The location of the travel also affects deductibility. If a taxpayer’s trip takes them away from their tax home—generally the city or area where they conduct most of their work—overnight or for a period requiring rest, the associated costs may be deductible. However, commuting between home and a regular workplace does not qualify.

Meal expenses incurred during business travel can be deducted at 50% of the actual cost or by using the per diem rates set by the General Services Administration (GSA). The per diem method simplifies recordkeeping by allowing a fixed daily amount instead of tracking each meal’s cost. Taxpayers must still document the time, place, and business purpose of the trip.

Using Gift Deductions

Business gifts can be deducted, but the IRS imposes limits. The maximum deduction allowed for gifts to a single recipient during the tax year is $25. This limit applies per individual rather than per gift, meaning that even if multiple items are given, the total deduction cannot exceed $25 per person. Incidental costs, such as engraving or packaging, do not count toward this limit if they do not significantly increase the gift’s value.

To qualify for a deduction, the gift must be directly related to the business and given with a clear professional purpose. For example, a company providing holiday gift baskets to key clients as a goodwill gesture may deduct up to the allowable limit per recipient. However, gifts that appear personal, such as expensive jewelry or entertainment tickets without a business discussion, may not qualify. If tickets to an event are given, they are generally considered entertainment expenses rather than gifts, meaning different deduction rules apply.

Businesses should maintain detailed records, including the recipient’s name, the business relationship, the gift’s cost, and the date it was given. Receipts and supporting documentation should be kept in case of an audit.

Car Expense Methods

Taxpayers who use their vehicle for business purposes can deduct related costs using either the standard mileage rate or actual expenses. The best choice depends on factors like vehicle usage, recordkeeping preferences, and total costs incurred.

Standard Mileage

The standard mileage method allows taxpayers to deduct a fixed amount per mile driven for business. For 2023, the IRS set this rate at 65.5 cents per mile. This approach simplifies recordkeeping by eliminating the need to track individual expenses like fuel and maintenance. To use this method, the taxpayer must choose it in the first year the vehicle is used for business. Switching to actual expenses later is allowed, but not vice versa if depreciation has been claimed.

Taxpayers must maintain a detailed mileage log recording the date, starting and ending odometer readings, business purpose, and destination of each trip. Personal and commuting miles do not count, and failing to keep accurate records can result in disallowed deductions. This method is often beneficial for those who drive frequently for work but have relatively low vehicle-related costs.

Actual Costs

The actual expense method allows taxpayers to deduct the direct costs of operating their vehicle for business purposes, including fuel, repairs, insurance, lease payments, registration fees, and depreciation. If the vehicle is owned, depreciation must be calculated using IRS guidelines, which may involve the Modified Accelerated Cost Recovery System (MACRS) or Section 179 expensing, subject to annual limits.

Since only the business-use portion of expenses is deductible, taxpayers must determine the percentage of miles driven for work versus personal use. For example, if a vehicle is used 60% for business, only 60% of total expenses can be deducted. Detailed records, including receipts and a mileage log, are required. This method benefits those with high vehicle-related costs but requires more documentation.

Mixed Usage

Many taxpayers use their vehicle for both business and personal purposes, requiring careful tracking to ensure only the business portion is deducted. The IRS does not allow deductions for commuting between home and a regular workplace, but travel between multiple business locations or to client meetings is eligible.

To accurately allocate expenses, taxpayers should maintain a mileage log that separates business and personal trips. If using the actual expense method, they must apply the business-use percentage to total costs. For instance, if total vehicle expenses for the year amount to $8,000 and 70% of miles driven were for business, the deductible amount would be $5,600.

Choosing between the standard mileage and actual expense methods depends on individual circumstances. Those with high business mileage and low operating costs may benefit from the standard rate, while those with significant vehicle expenses may find the actual cost method more advantageous. Proper documentation is essential regardless of the approach used.

Reimbursement Procedures

Employers often reimburse employees for business-related expenses, but the tax treatment depends on whether the reimbursement plan is accountable or nonaccountable under IRS rules. An accountable plan requires employees to substantiate expenses with receipts and return any excess reimbursement within a reasonable time, ensuring these payments are not subject to income or payroll taxes. In contrast, reimbursements under a nonaccountable plan are treated as taxable wages and must be reported on Form W-2.

To qualify as an accountable plan, reimbursements must have a business connection, employees must adequately document the costs, and any excess payments must be returned. Failure to meet any of these conditions results in the reimbursement being classified as taxable income, increasing both employer and employee tax liabilities. Employers using per diem allowances must adhere to IRS-approved rates, as exceeding these limits can trigger tax consequences.

Companies that fail to establish a clear reimbursement policy risk misclassifying payments, leading to payroll tax issues and potential IRS penalties. Employers should implement structured policies defining eligible expenses, documentation procedures, and repayment timelines. Regular audits of expense reports help ensure compliance.

Documentation Essentials

Maintaining proper documentation is necessary for substantiating business expenses. Without adequate records, deductions may be disallowed, and taxpayers could face additional scrutiny in an audit. The IRS requires that records be timely, meaning they should be created at or near the time of the expense rather than reconstructed later.

Receipts, invoices, and bank statements serve as primary evidence, but additional details are often needed. For travel and vehicle-related deductions, taxpayers must maintain a log that includes dates, locations, business purposes, and amounts spent. Digital recordkeeping solutions, such as expense-tracking apps or accounting software, can help streamline this process and reduce the risk of lost documentation. For business gifts, records should specify the recipient’s name, business relationship, and the cost of the gift. Employers reimbursing expenses under an accountable plan must also retain employee-submitted documentation.

Consequences of Noncompliance

Failing to adhere to IRS guidelines for business expense deductions can result in financial penalties, disallowed deductions, and increased audit risk. If expenses are improperly claimed or lack sufficient documentation, the IRS may require repayment of any tax benefits received, along with interest and potential accuracy-related penalties, which can be as high as 20% of the underpaid tax.

In cases of willful misrepresentation, such as inflating expenses or fabricating records, taxpayers may face more severe consequences, including fraud penalties of up to 75% of the underreported amount. Businesses that fail to properly classify reimbursements under an accountable plan may also be subject to payroll tax assessments. To mitigate these risks, taxpayers should periodically review their expense tracking methods, ensure compliance with IRS guidelines, and consult a tax professional if uncertainties arise.