Don’t Expose Yourself with Improper Use of the $75 Rule

Don’t Expose Yourself with Improper Use of the $75 Rule

When the $75 rule applies, you don’t need a receipt.

The problem with this rule is that it is often thought to apply to all tax deductions. That’s wrong.

Now, think of the taxpayers who incorrectly apply the $75 rule to all of their tax deductions. They are exposed to a massive loss of deductions and likely some penalties too.

The $75 Rule

IRS Reg. Section 1.274-5(c)(2)(iii) contains the $75 rule.1 Notice 95-50 contains a clear explanation of what the $75 rule applies to.2 Here’s how it works:

You don’t need a receipt for business travel expenses that are less than $75, with two exceptions: (1) you always need a receipt for lodging regardless of price, and (2) you don’t need a receipt for transportation costs of $75 or more if the receipt is not readily available (an unlikely event, in our opinion).
You don’t need a receipt for business vehicle expenses that are less than $75—this rule applies to all modes of transportation, including your yacht and airplane3 (assuming you are so lucky as to have a yacht and an airplane).
You don’t need a receipt for business gifts that cost less than $75—but remember that there’s a $25
limit on deductions for business gifts, so the practical limit is $25.

Key Point: Technically, the $75 rule applies to entertainment—but you may remember that the Tax Cuts and Jobs Act (TCJA) disallows business entertainment deductions, so the $75 rule has no application with respect to business entertainment.

Business Meals: Thanks to the TCJA, business meals are not entertainment, so you need receipts for all business meals, except for meals consumed while in travel status where the $75 rule applies.

Receipts Rule Quiz

Here are ﬁve questions about the $75 rule, along with the answer for each.

Questions:

I spend $65 on a meal with my best customer. Do I need a receipt? - Yes
I spend $70 putting gas in my business vehicle. Do I need a receipt? - No
I spend $5 on staples for my ofﬁce. Do I need a receipt? - Yes
I’m in overnight travel status, and I spend $55 on dinner for myself. Do I need a receipt? - No
I spend $33 at a not-so-great hotel while away from home overnight on business travel. Do I need a receipt? - Yes

You can see how easy it is to get this rule wrong.

Beware

Your bank and credit card statements do not give you a receipt. As with a canceled check, the statements prove that you paid the money but not what you paid for. You need both the receipt (proof of what you purchased) and the canceled check or credit card statement (proof of payment) to prove the expenditure.

Example: Sally spends $85 on gas and $25 on groceries at the gas station. The credit card shows the $110 purchase, but only the receipt sets forth the $85 gas purchase.

With Receipt or Without Receipt

The fact that you can avoid having a receipt does not let you off the hook for documenting your expense.

To properly document a $60 meal consumed during deductible business travel, you need to prove the following:

Amount spent
Date of the meal
Name and location of the restaurant

Because the meal is under $75, you don’t need a receipt. But with no receipt, you have to write down this information. With a receipt, you have this information already recorded.

Key Point: Receipts often take less time—and for sure, receipts are better evidence in an IRS audit.

Cash Question

Don’t think you can make up expenses and get away with it.

Example: Willie shows the IRS agent a log book indicating he spent $180 a day on business meals ($50 on breakfast, $60 on lunch, and $70 on dinner) for each of four consecutive business travel days. The IRS examiner asks Willie where he got the $720 in cash that he supposedly spent on the meals:

Did he make an ATM withdrawal?
Did he cash a check?

Ease the Pain

Don’t let the $75 receipts rule clutter your mind. Keep receipts for everything. It’s not complicated. And in many cases, it makes meeting your burden of proof as a business taxpayer easier.

Takeaways

The $75 rule in tax deductions does not apply to all expenses and can often be misunderstood by taxpayers, leading to loss of deductions and penalties.
Taxpayers must keep receipts for business expenses, including meals consumed during deductible business travel, to properly document their expenses.
Bank and credit card statements do not provide sufficient proof of expenses; taxpayers need both receipts and canceled checks or credit card statements to prove the expenditure.
The Tax Cuts and Jobs Act (TCJA) disallows business entertainment deductions, rendering the $75 rule irrelevant for this type of expense.
Taxpayers should keep receipts for all business expenses to make meeting their burden of proof as a business taxpayer easier, as receipts often serve as better evidence in an IRS audit.

The $75 rule in tax deductions is a simple and straightforward guideline for taxpayers to follow, but it is important to understand its limitations. While it exempts certain business expenses from the requirement of having receipts, it is not a blanket rule for all tax deductions.

As I highlighted in this article, receipts are necessary for many other types of expenses, including business meals and travel-related expenses. Proper documentation of expenses and keeping receipts for everything can make meeting the burden of proof as a business taxpayer easier and prevent loss of deductions and penalties.

At Jackson CPA, we are passionate about empowering our customers to make the most of their financial assets through smart tax optimization strategies. If you have questions or concerns about the $75 rule for your business, we are here to help.