The $75 Rule, and What the IRS Means by Adequate Records

There is a version of this article that is a list of receipts to keep. This is not that. The receipts are the easy part, and they are not what fails.

What fails is business purpose. An examiner looking at your Schedule C is not usually asking whether you spent the money — your bank says you did. They are asking what the money was for, and whether the record establishing that was made when you spent it or reconstructed afterward from memory and hope.

What “adequate records” actually requires

For every business expense you need four elements:

1. Amount
2. Date
3. Place — where it was incurred, or who it was paid to
4. Business purpose — why it was an ordinary and necessary expense of your business

For meals and gifts, add a fifth: the business relationship of the people involved. Who was at the table, and how do you know them professionally.

Notice what is not on that list: a receipt. A receipt is one form of evidence for the first three elements. It is evidence for the fourth only if you write on it.

The $75 rule, correctly stated

Documentary evidence — a receipt, an invoice, a bill — is required for any expense of $75 or more, and for lodging at any amount, no matter how small.

Below $75 you do not need the paper. You still need the four elements. Agents read the $75 threshold as permission to stop tracking small expenses, and it is precisely the opposite: it is permission to stop keeping paper for them, on the assumption you are keeping a record some other way.

The practical effect for an agent is that most of your spend sits below $75 — parking, lunch with a lender, a lockbox battery, the sign rider — and that is the spend most likely to have no record at all beyond a bank line.

A card statement proves a merchant was paid. It never proves purpose. Between those two facts is every dollar you lose in an examination.

The four categories with no safety net

For ordinary business expenses, there is a fallback. Where a taxpayer establishes that an expense was incurred but cannot document the exact amount, courts have sometimes permitted a reasonable estimate. It is not generous, it is not a right, and it requires convincing a judge — but it exists.

It does not exist for:

• Travel
• Meals
• Gifts
• Vehicle expenses

Congress carved these out by statute and required strict substantiation. No records, no deduction. Not a reduced deduction — none. It does not matter that you obviously drove to showings, or that the closing gift obviously happened.

Those four are, not coincidentally, an enormous share of a working agent’s expenses. The mileage deduction alone is usually the largest single line on the return, and it sits entirely inside the no-fallback zone. Which is why the mileage log gets its own discipline.

Listing-linked spend: the agent-specific trap

Three categories on a real estate agent’s return look identical to personal spending on a bank statement:

• Staging — furniture rental, decor, a $900 invoice from a staging company
• Photography — a photographer’s fee, drone work, a camera rental
• Signage and supplies — hardware, printing, materials from a big-box store

A $900 staging invoice with nothing attached reads as home decorating. The same invoice tagged to 1420 Willow Creek reads as a marketing cost for a specific listing. The invoice did not change. The record did.

The regulations expect listing-specific spend to connect to the listing that generated it, and an examiner who cannot make that connection is entitled to recharacterize the expense as personal — and generally will. This is the single highest-yield habit available to an agent: attach the address at the moment you record the charge. In the moment it takes two seconds. In April it is a guess, and in an audit it is a loss.

Separate the accounts

Commingling business and personal spending is not against any rule. It just converts every question into a forensic exercise.

An examiner working from a business account asks about specific transactions. An examiner working from a personal account where the business also lives asks about the whole account — and now you are explaining your grocery bill. The scope of the conversation is set by the shape of your records.

One business checking account and one business card. It is the cheapest audit protection available and it costs an afternoon at the bank.

How long to keep it

• Three years from the filing date — the ordinary assessment period.
• Six years if gross income was understated by more than 25%.
• No limit where no return was filed, or where fraud is alleged.
• Asset basis records — the invoice for a vehicle, a camera, a laptop — for as long as you own the asset, plus the ordinary period after you dispose of it, because the gain or loss on disposal depends on them.

Electronic copies are acceptable, provided they are legible, complete, and reproducible. Photograph the receipt and throw the paper away; thermal paper fades to blank inside two years anyway, which makes the shoebox strategy self-defeating.

What an examiner opens first

In practice, attention lands in a predictable order:

1. Vehicle expense — the biggest number with the strictest rules and, usually, the weakest record.
2. Meals — for the fifth element. Who was there, and what was the business relationship.
3. Round numbers anywhere. Twelve identical monthly entries did not come from a business.
4. Large one-off charges with generic categories. “Supplies — $2,400” invites the question that “Staging, 1420 Willow Creek — $2,400” answers before it is asked.
5. Personal-looking merchants. Home improvement stores, department stores, restaurants on weekends.

None of these is evidence of anything. They are just where the questions start, and a record that answers them on sight ends the conversation early.

The fifteen-minute habit

Everything above reduces to doing a small thing at the right time instead of a large thing at the wrong one:

1. Photograph the receipt when you get it. Not at the end of the week.
2. Write the purpose in the moment. “Coffee — Dana Reyes, lender, referral pipeline” takes six words and is unanswerable a year later.
3. Attach the listing to anything listing-specific, always.
4. Categorize weekly. Friday, fifteen minutes. The purpose of a charge is obvious three days later and a guess in nine months.
5. Keep the accounts separate so nobody has to ask about your groceries.

ListingLedger is built around this: receipts attach to transactions, the $75 threshold and the business-purpose prompt fire on the categories where the IRS requires them, and listing-specific categories will not save without an address or a stated purpose attached. That last one is deliberately annoying, for the same reason a seatbelt chime is. The line-by-line deduction guide covers what belongs where once the record exists, and the rules reference covers the $75 threshold, the reconstructed-evidence route when the receipt is genuinely gone, and every other check that runs before a deduction is allowed.