Tips & Tricks

Do you keep your receipts?

Every tax season, I receive this type of email:

While I like the natural Google prompts of “Yes and yes.",  that wouldn’t be accurate. One – because it depends, and two – I didn’t win my pickleball tournament.

Just remember the $75 rule and the K.I.A rule. $75 is a threshold. K.I.A stands for Keep It Anyways.

What do these rules mean?

The $75 rule applies to certain business expenses where you do not need a receipt. But we emphasize that this rule does not apply to all tax deductions. Many taxpayer mistakenly apply the $75 rule to all their tax deductions, which can result in a significant loss of deductions and penalties. 

We encourage you to know the $75 rule and its limitations to avoid potential negative consequences. IRS Reg. Section 1.274-5(c)(2)(iii) contains the $75 rule, and Notice 95-50 provides a clear explanation of what it applies to. The rule applies to business travel expenses, vehicle expenses, and gifts that cost less than $75. But remember that the $25 limit on deductions for business gifts applies, meaning the practical limit is $25.

It’s worth noting that your bank and credit card statements do not provide sufficient proof of expenses for tax purposes. You need 1. the receipt (proof of what you purchased) and 2. 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 that you properly document all your expenses. 

Keep your receipts

Now let's say you document a $60 meal consumed during deductible business travel. With or without a receipt, 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 would be easier if you kept the receipt. 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.

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