I get ask about the $75 rule from time to time and thought I'd refresh your memory on this, as it is a bit confusing.
Many taxpayers mistakenly apply the $75 rule to all their tax deductions, which can result in a significant loss of deductions and penalties. So, I encourage you to know the $75 rule and it's limitations to avoid potential negative consequences.
The $75 rule basically applies to certain business expenses where you do not need a receipt. But I emphasize that this rule does not apply to all tax deductions.
The $75 rule applies specifically to business travel expenses (although Lodging always requires a receipt), vehicle expenses, and gifts that cost less than $75. Everything else less than $75 requires a receipt. And remember that the $25 limit on deductions for business gifts applies, meaning the practical limit is $25.
So, if you buy your favorite accountant a new $15.75 calculator, you have to have a receipt. If you spend $70 in fuel, you don't need a receipt.
To help you see how this works, here are five questions about the $75 rule, along with the answer for each.
Question: I spend $65 on a meal with my best customer. Do I need a receipt? Answer: Yes
Question: I spend $70 putting gas in my business vehicle. Do I need a receipt? Answer: No
Question: I spend $5 on staples for my office. Do I need a receipt? Answer: Yes
Question: I’m in overnight travel status, and I spend $55 on dinner for myself. Do I need a receipt? Answer: No
Question: I spend $33 at a not-so-great hotel while away from home overnight on business travel. Do I need a receipt? Answer: Yes
It’s also worth noting that your bank and credit card statements do not provide sufficient proof of expenses for tax purposes. You need to have both the receipt (proof of what you purchased) and the canceled check or credit card statement (proof of payment) to substantiate the expenditure.
While the $75 rule may allow you to avoid having a receipt for some expenses, it is crucial to document all your expenses properly. To document a $60 meal consumed during deductible business travel with or without a receipt, for example, you need to prove the amount spent, the date of the meal, and the name and location of the restaurant.
While you don’t need a receipt for the $60 travel meal, your documentation life is easy with a receipt.
Bottom line, we encourage you to keep all your receipts for tax purposes, as they often take less time to keep track of and are better evidence in the event of an IRS audit.
If you want to discuss the $75 rule or have any other questions, you know where to find me.