Understanding the $75 dollar rule for business expense deductions

Some companies expect employees to cover business expenses with their personal funds before reimbursement, while some use corporate cards with robust spend controls and automated data capture. The company then reimburses the employee if they met all set requirements.

The IRS provides 2023 expense reimbursement guidelines, and one area often discussed is the $75 receipt rule. This article discusses business expenses, the IRS $75 receipt rule, and what you need to know to maximize its tax benefits.

What are business receipts, and why are they important?

Business receipts are digital or paper documents that record each time one of your employees purchases on behalf of your business. The most important function of business receipts is to provide backup documentation for the expenses your company deducts when filing its tax return.

Examples of business receipts include bills marked “paid,” receipts from a cash register, receipt books, and 1099-MISC forms that document the amount of money your business paid to independent contractors.

Although there’s no set rule for how long your business should keep business receipts, the IRS strongly recommends a minimum of three years. With today’s technological advances, many companies keep their receipts indefinitely in case the IRS performs an audit or outside investors want to perform due diligence on a potential investment opportunity.

One way to support receipt capture, spend data collection, and storage is with a spend management solution like Payhawk. With us, all employees need to do is spend using their corporate Payhawk card, take a photo of the receipt, and upload it to the app.

The AI-supported camera then pulls out all of the vital receipt information in seconds, and the app even lets the employer select a custom expense field (from a dropdown provided by the finance team). This means that the purpose of the spend is recorded, and the data can flow seamlessly into the accounting software or ERP to automate bank reconciliation.

What are the IRS receipt requirements for business expense receipts?

The IRS receipt requirements for both $75 and under expenses and expenses, in general, are straightforward. Each receipt should include:

• Date, time, and amount
• The name of the business where the employee made a payment and created the expense
• Receipt should be an original unless the original is unavailable
• Receipt should be accompanied by an invoice or bank statement if possible

What counts as deductible business expenses?

Business expenses are deductible if they’re “ordinary and necessary” to help the business make money.

Ordinary and necessary expenses are expenses that are typically used in an industry and help create profits. For example, if you run a mobile pet grooming business, a large van to move supplies and perform services will be tax deductible. However, having an expensive two-seat sports car that isn’t typically used to perform services in the pet grooming industry will not be deductible.

Does the IRS require receipts under $75?

For companies not yet leveraging corporate cards, the IRS receipt requirements for $75 expenses states that if the expense follows a proper employee reimbursement plan, expenses under $75 other than lodging do not necessarily require a receipt to be tax deductible.

According to the IRS, the requirements for a business expense to be reimbursable are as follows:

• There is a business reason for the expense
• The employee incurred the expense during their normal duties
• The expense is documented, usually by *receipts or other original documents. (*The $75 receipt rule provides an exception to the general receipt requirement but must otherwise meet each of the guidelines)
• Excess reimbursements are returned to the employer
• If the employee keeps excess reimbursements, they will be counted as wages, and both the business and the employee will be responsible for the applicable payroll tax

Does my company need an expense reimbursement plan?

The IRS strongly recommends companies that offer employee reimbursements do so according to an expense reimbursement plan.

Expense reimbursement plans have guidelines that employees must follow to qualify for reimbursement. For example, the state of Illinois requires employees to turn in mileage expenses within 30 days to be eligible for reimbursement.

One way companies establish a robust expense reimbursement plan is to offer per diem allowances to reimburse employees for expenses incurred for lodging, meals, and incidental expenses while traveling. These programs are popular among employers as per diem expenses are tax deductible and only require a per diem expense report to meet documentation requirements.

Per diems can save time and further streamline the expense reimbursement process as employees can fill in the per diem expense report once each period rather than document each reimbursable expense with a receipt and other necessities.

Get more details on the IRS expense reimbursement guidelines for 2023 on the IRS website here.

Corporate cards and expenses

Another way for companies to tackle business spend and tax-deductible expenses is with corporate cards and expense management software from solutions like Payhawk.

Many companies find corporate cards far more effective than reimbursements for the following reasons:

• In-built controls like ATM blocks or spending limits
• Approval workflows for fund requests (with auto-approvals built-in)
• Real-time spend visibility so that the finance team can make informed decisions around cash flow and controls
• Real-time reconciliation as any spend or receipt data travel seamlessly to the ERP thanks to intelligent categorization
• Bill payments software
• Zero waiting time for reimbursements (so no colleagues left out of pocket)

Summary

The $75 rule is an exception; with it, the IRS allows companies to deduct business-related expenses without needing a receipt. Company reimbursement plans, such as per diem allowances, streamline the reimbursement process by allowing for expense summary reports as sufficient documentation to prove when an employee incurred an expense and prove it was business-related.

Although receipts are not required under the $75 rule, keeping as much documentation as possible in case the IRS performs an audit or otherwise requires the documentation is always advisable.

If your business follows the 2023 IRS expense reimbursement guidelines, your expense reimbursements should run smoothly. But there are always ways to move faster, more effectively, and with better insights.

Book a demo to learn how Payhawk could supercharge how your business manages spending.