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

When the $75 rule applies, you don’t need a receipt.  However, the application of this rule is fairly specific and actually can leave you exposed without adequate documentation.  Following is information on the $75 rule.  Nevertheless, our recommendation in spite of this rule is to collect receipts for everything.

What is 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 transportation3.

• 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.

1. I spend $65 on a meal with my best customer. Do I need a receipt? YES

2. I spend $70 putting gas in my business vehicle. Do I need a receipt? NO

3. I spend $5 on staples for my office. Do I need a receipt? YES

4. I’m in overnight travel status, and I spend $55 on dinner for myself. Do I need a receipt? NO

5. 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:4

• 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.

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.

Questions?
 If you have any questions or concerns, please do not hesitate to contact TrueBlaze Advisors. 

Read more about simplified information about your complex tax concerns.