The $75 rule says that you don’t need a receipt for some business costs that cost less than $75. But as small business tax advisors, we want to stress that not all tax deductions follow this rule.
Many taxpayers make the mistake of applying the $75 rule to all of their tax deductions. This can cause them to lose a lot of deductions and pay penalties. I want you to know about the $75 rule and how it works so that you can avoid any bad things that could happen.
The $75 rule is found in IRS Reg. Section 1.274-5(c)(2)(iii), and Notice 95-50 makes it clear when it applies. The rule applies to business travel costs, vehicle costs, and gifts that cost less than $75. But remember that you can only deduct up to $25 for business gifts, so the real limit is $25.
It’s important to know that your bank and credit card statements are not enough proof of expenses for taxes. To prove what you spent, you need both the receipt (which shows what you bought) and a canceled check or credit card statement (which shows how you paid).
Even though the $75 rule may let you get by without a receipt for some expenses, it is very important to keep track of all your expenses in the right way. For example, if you ate a $60 meal while on deductible business travel, you need to prove the amount spent, the date of the meal, the name and location of the restaurant, and whether or not you have a receipt.
Even though you don’t need a receipt for the $60 travel meal, having one makes it easier to keep track of your expenses.
We recommend that you keep all of your receipts for tax purposes because they are often easier to keep track of and provide better proof in case the IRS audits you.
We know that taxes can be hard for small business owners. Schedule your free tax consultation and find out more about how the ideas in the article can apply to your specific tax situation.