This question tends to arrive in one of two moods. Either it is October and the year is being tidied up, or a letter has arrived and the tidying up is no longer optional. The honest answer to what can be deducted without receipts is narrower than most articles suggest, and the useful answer is about what counts as a record in the first place.
What follows is general information rather than tax advice. The rules described below are federal rules and several of them have edges. Anything consequential should be put to your CPA before it is relied upon.
Key Takeaways
- No category of business expense is deductible without records of any kind, and what varies between categories is the form of record that is accepted.
- Travel, meals and business gifts costing less than $75 per expense do not require a receipt, but do require a written record of the amount, the date, the place and the business purpose, and lodging requires a receipt at any amount.
- Travel, meals, gifts and listed property including passenger vehicles are governed by a strict substantiation rule, under which a court is not permitted to estimate the deduction.
- For expenses outside those categories, the Cohan rule permits a court to approximate a deduction where the records have been lost and the expense plainly occurred.
- A bank statement or a card statement establishes that a payment was made to a particular party and does not establish the business purpose of that payment.
The underlying requirement
The tax code requires a taxpayer to keep records sufficient to establish the deductions claimed on the return. The burden rests with the taxpayer rather than with the Internal Revenue Service. The tax code does not require that the record takes the form of a paper receipt.
The operative question in respect of any particular deduction is therefore not whether receipts exist in respect of that deduction. The operative question is whether four elements can be established in respect of each expense, being the amount, the date, the item or service purchased, and the business purpose of the expenditure. A receipt is convenient because a receipt establishes three of those four elements within a single document. A receipt never establishes the fourth element, being the business purpose of the expenditure.
The $75 rule and the exception to it
In respect of travel, meals and business gifts, a receipt is not required where the expense amounts to less than $75. That exception derives from the substantiation regulations and represents the nearest thing to a genuine allowance for expenses without receipts.
Two qualifications narrow that exception considerably in practice. Lodging is excluded from the exception, so a receipt is required for lodging irrespective of the amount and no threshold of $75 applies to a hotel room. A written record remains required for every expense to which the exception applies, because the exception removes the requirement for a receipt and does not remove the requirement for documentation. A log entry or a calendar entry recording the amount, the date, the place and the business purpose remains required, and an unexplained charge of $62 is not deductible merely because the charge falls below $75.
The threshold of $75 applies to each individual expense rather than to each day or to each trip. The threshold of $75 has also not been adjusted for inflation since the threshold was established, which is the reason the threshold covers considerably less than the threshold once covered.
The categories in which estimates are not permitted
Section 274(d) of the tax code imposes strict substantiation requirements on four categories of expenditure, being travel, meals, business gifts and listed property, and listed property includes passenger vehicles used in the business.
Where any required element is missing in respect of an expense falling within those four categories, the deduction is disallowed. A court is not permitted to make a reasonable estimate on behalf of the taxpayer, irrespective of how credible the taxpayer is and irrespective of how plainly the expenditure occurred. Every other business expense is governed by a more accommodating standard, and that standard is described below.
The Cohan rule
In a case decided in 1930 concerning the songwriter George M. Cohan, the Second Circuit held that where a taxpayer has plainly incurred deductible expenses and the records of those expenses have been lost, the court may estimate the amount of the deduction rather than disallow the deduction entirely.
The Cohan rule remains good law and is still applied, and the Cohan rule carries conditions. The taxpayer is required to establish that the expenditure actually occurred and is required to provide a reasonable basis on which the estimate may be made. Courts tend to estimate conservatively, on the basis that the uncertainty arises from the conduct of the taxpayer. The Cohan rule does not extend to the categories governed by section 274(d).
The Cohan rule can therefore assist in respect of materials, supplies, subcontractors and comparable operating costs. The Cohan rule will not preserve a deduction claimed for mileage or for any other vehicle expense.
Vehicle expenses
A deduction claimed for mileage requires a log recording the date of each trip, the destination of each trip, the business purpose of each trip and the miles driven on each trip, together with the total miles driven during the year. The substantiation requirement applies equally whether the standard mileage rate is used or actual expenses are claimed.
A log prepared at the end of the year from memory carries less weight than a log maintained contemporaneously, and that difference in weight is material in an examination. Where gaps exist in the record, the practical course is to reconstruct the log from the records that do exist, including calendar entries, client appointments, delivery confirmations, toll records, fuel records and mapped distances between known addresses. A reconstruction assembled in that manner is defensible in a way that a rounded estimate is not.
Records accepted in place of a receipt
| Form of evidence | Establishes | Does not establish |
|---|---|---|
| Bank or credit card statement | The amount, the date and the payee | The business purpose, or the item purchased |
| Duplicate receipt obtained from the vendor | Everything a receipt would establish | Nothing, and a vendor copy is the strongest option |
| Calendar and appointment records | The date, the attendees and the purpose | The amount |
| Email confirmations and invoices | The amount, the date and the item purchased | The business purpose, in some cases |
| A contemporaneous log or notes | All four elements, where properly maintained | Nothing, where the log is genuinely contemporaneous |
| Photographs of receipts | Everything a paper receipt would establish | Nothing, and digital copies are accepted |
Scroll sideways to see all columns.
A consistent pattern runs through every row of the table set out above. Financial records establish that money moved between two particular parties on a particular date. Financial records almost never establish the reason for which the money moved between those parties. Pairing a statement line against a calendar entry or against an email thread is what closes that gap, and that pairing is the reason a statement standing alone represents a weak position.
The procedure that follows an examination is described separately in what happens if you are audited with no receipts.
Reconstructing a year of records
Working in the order described below tends to be the fastest approach. Twelve months of bank and card activity should be exported and sorted by vendor, because recurring vendors are the easiest transactions to categorize and ordinarily account for the majority of the dollars. Duplicates should then be requested from the larger vendors, since most vendors will supply a year of invoices without objection and a vendor copy carries the same weight as an original.
The calendar for the year should then be retrieved and compared against travel charges and meal charges, because the calendar is the record from which business purpose is established. Email should then be searched by vendor name rather than reviewed by scrolling, in order to locate order confirmations, receipts and invoices. Mileage should be reconstructed last, using the destinations identified during the preceding steps.
The business purpose of each item should be recorded in writing while the purpose is still remembered, because the purpose will not be remembered in the following year.
Record retention periods
The general period is three years from the date on which the return was filed. The period extends to six years where more than 25% of gross income was omitted from the return, and no limitation period applies where no return was filed or where fraud is alleged. Employment tax records are retained for a period of four years from the date the tax became due or was paid. Records supporting the basis of property are retained until the property is disposed of, together with the applicable period following disposal.
Digital copies are accepted, which makes the problem described throughout this article substantially avoidable in future periods. Photographing a receipt at the point the receipt is handed over takes a few seconds and eliminates the entire category of work described above.
The cheapest version of this problem is the one you never have. GlassJar captures receipts from a photo or a forwarded email and attaches them to the matching transaction, so the business purpose is recorded next to the amount while you still remember what it was for. See how it works.
Frequently asked questions
What deductions can be claimed without receipts?
No set of deductions requires no records at all. Travel, meals and gifts costing less than $75 per expense do not require a receipt but do require a written record of the amount, the date, the place and the business purpose. Lodging requires a receipt at any amount.
Are bank statements sufficient to support a deduction?
Bank statements are partially sufficient. A statement establishes the amount, the date and the payee, and a statement does not establish the item purchased or the business purpose of the expenditure, so a statement ordinarily requires supporting evidence.
Can mileage be deducted without a log?
Vehicle expenses fall within the strict substantiation rules, so a court is not permitted to estimate the deduction. A reconstruction assembled from calendars, appointments and mapped distances is the practical course and carries more weight than a rounded estimate.
What is the Cohan rule?
The Cohan rule is a long standing principle permitting a court to approximate a deduction where the expenditure plainly occurred and the records have been lost. The Cohan rule does not apply to travel, meals, gifts or vehicle expenses.
How long should business receipts be retained?
The general period is three years from filing, extending to six years where substantial income was omitted, and four years for employment tax records. Records supporting the basis of property are retained until disposal together with the applicable period afterward. Digital copies are accepted.
