This IRS Rule Could Save You Money (Until You Read the Fine Print)

You've probably heard you don't need receipts for anything under $75, and that's true, except when it isn't. So, let's break down what the actual tax law says, when you can skip the receipt and tell the auditor to go fish, and when those missing receipts will leave you completely dead in the water.

And I'm Jasmine Deluchi. I'm a practicing tax attorney, CPA, enrolled agent. I got my first tax license as an enrolled agent in high school. And in today's video, I'll cover three things, okay?

First, the actual tax law on when you can throw out receipts under $75. Second is how this applies in real life, including real court case results where taxpayers use this argument against the IRS. And third, what you should do to protect your business today.

All right, to cover the actual tax law, we need to start at the beginning because the $75 rule doesn't exist in a vacuum. It's an exception. And to understand an exception, we first have to know the rule. Here's the general rule. Business deductions start with IRC 162, the cornerstone of business tax law. It says you can deduct any expense that's ordinary and necessary in carrying on your trade or business. But here's the catch. You have the burden of proof. Okay? You're the one who knows the details, who spent the money, and who controls the records. So the IRS doesn't have to prove you're wrong. You have to prove that you're right.

That raises the question, what kind of proof do you actually need? Congress realized that some expenses like travel, meals, gifts, and vehicles are especially easy to abuse. So they created IRC 274D to set a higher bar for those categories. Under 274D, no deduction is allowed for those expenses unless you can substantiate with adequate records or other credible evidence the following four things. Okay. The amount of the expense, the time and place it occurred, the business purpose of the expense, and the business relationship of the people involved. That's the tax code. Okay.

Now, the Treasury regulations tell us what it actually means to keep adequate records. There are two parts to it. Okay. You need a diary or log or similar record. Something created at or near the time of the expense that shows the amount, time, place, and business purpose. You also need documentary evidence like receipts, paid bills, or similar proof for any expense of $75 or more, and for all lodging expenses, no matter the amount.

The regulations also make one small but important exception. Okay? You don't have to keep duplicate records. So, if your receipt already includes certain information like the date, amount, and purpose, you don't need to maintain a separate written log with that information.

So, what does all of this really mean? Okay, basically, if you don't keep the receipt, you now have to create your own detailed records with that information. That means recording every detail the receipt would have shown in a contemporaneous log. So, while the $75 rule eliminates the requirement to keep the receipt, it does not eliminate the requirement to keep the detailed real-time proof.

Now, let's go over how this plays out in real life. Here's your classic scenario, okay? Straight out of social media. You're a content creator and you see a video from your favorite tax influencer saying, "Anything under $75 doesn't need a receipt or anything. Just write it off." You don't watch my channel, okay? So, you start spending $40 on lunch on March 15th, $30 on coffee on April 3rd, $50 on Uber on May 12th, all under $75. So, you figure you're golden with just your credit card statements and bank statements. At tax time, you pull everything into a nice, neat spreadsheet, total it up, and deduct it on your Schedule C. No receipts, no problem, right?

But here's what actually happens. When people think that's how it works, you end up like David Tyler, who tried to claim travel and entertainment deductions using summaries he created years later. The court allowed only $6 total across 5 years because the rest of his records weren't made at or near the time of the expenses. Even though his story was credible, the tax court said that without contemporaneous, which is real-time documentation, the deductions fail under IRC 274D.

Or you end up like Angela Perfetti, an airline pilot who kept a log showing only dates and meal types, breakfast, lunch, or dinner, okay, with estimates rather than amounts and receipts. He argued the small expense exception applied, right? The court disagreed and denied nearly all of the deductions, holding that the rule waives receipts, not the need for substantiation.

Or you end up like James O'Donnell, who did keep a diary of meals, but never wrote down the business purpose or who was there. The court allowed only a few items and made it clear that even under the small expense rule, you still have to record every required detail. The exception waives receipts, not recordkeeping.

And here's what's painful about situations like all of these. Okay? It doesn't matter if they spent money on legitimate deductible business expenses without detailed support. It's assumed to be not deductible.

Here's what I recommend if you actually want to protect your business and your money. Okay? Build an automated system to keep receipts, not a shoe box of paper, because I promise the IRS auditor will not organize it for you. Instead, set up a system that automatically stores every receipt without you having to decide whether it fits under the $75 exception. We live in a world full of technology. Use a software that links a photo of your receipt directly to the transaction in your books. Okay, that one extra step can save you hundreds of hours and thousands of dollars if ever audited.

Treat the $75 exception as a safety net, not a strategy. Okay? It's there to save you if you lose a small receipt, not to give you permission to skip documentation. The rule only helps if you can still prove the time, place, amount, and business purpose, almost everything that would have been shown on the receipt itself. And the simplest way to do that, just jot a quick note on the receipt and upload it into your bookkeeping system. Okay?

And finally, if you ever end up without receipts, the Cohen rule is your last resort. This comes from Cohen v. Commissioner and it allows courts to estimate expenses only when there's credible evidence they happened, but it only applies to regular business expenses under IRC 162, not travel, entertainment, or vehicles under 274. And it's not a sword against the IRS. It is a facts and circumstances fallback. Okay? Once you are relying on Cohen, you are playing defense, not offense.

Here's the bottom line. The $75 receipt rule is real, but it is so narrow. Okay, so narrow that it is not worth changing your documentation habits for. Keep the receipts, build the system, and stay audit-proof. And if you think tax law should actually be understandable and free to learn online, then subscribe for actual tax law from a tax attorney.