The Truth About Saving Receipts–and About Deductions

Millions of solopreneurs, freelancers, and contractors in America feverishly save every receipt related to their business. Maybe they’re in a shoebox, or maybe you’re taking a picture of them on your phone, hoping you’ll remember to come back to it around tax time.

In reality, it’s a myth that you need a physical receipt for every deduction (it’s also a myth that this is a sound tax strategy, but more on this later).

Simply put: purchases under $75 don’t require receipts, and for many larger purchases, your credit card and bank statements are a sufficient form of documentation. 

Before we dig into it, here’s a quick flow chart that breaks down the rules.

You can skip receipts and documentation for expenses costing less than $75

Regardless if you pay cash or credit, you don’t need a receipt for anything that costs less than $75 as long as your expense is “reasonable and ordinary.”

An accountant might refer to this as the “Cohan rule,” named after the 1930 Cohan vs. Commissioner court case. This case established that you can estimate your write-off amount for something you bought for work but don’t have a record of buying, as long as it’s under $75 (except if it’s travel lodging, strangely).

The difficult part here is making sure you’re keeping track of these expenses, even if you aren’t saving each receipt. This is why, at Lettuce, we recommend centralizing all of your expenses into a single business bank account and single credit card where you can confidently track every dollar. Lettuce will even auto-categorize every expense as it comes in, saving you the end-of-year headache.

For most $75+ purchases, your bank and credit card statements are enough.

The IRS wants straightforward documentation here of what you purchased, when, from who, and how much you spent. This is all typically captured with a credit card and bank statement. In fact, the IRS even explicitly says that bank and credit card statements provide sufficient “documentary evidence.” 

This means you can either go through your statements and categorize what was a business expense and what wasn’t (that is, if you aren’t simply organizing everything through one automated system with a central business bank account, like Lettuce).

Travel, Meals, and Gifts have special rules

For meals, travel, and gifts that are over $75, the IRS looks for “extra substantiation.” In order to prove it was a business expense, you should keep record of the event: 

• Where and when it was
• Who was there
• How are they connected to your business
• Why it happened

You’ll need this substantiation regardless of the cost of the expense. If it’s over $75, you should also keep some kind of documentation of the expense, like your bank statement and credit card statement. Again, this doesn’t have to be a paper receipt.

The truth is, you really only need a paper receipt if you made a cash purchase over $75. Otherwise, as long as you have clear documentation in some other form that the IRS accepts, like a bank statement and credit card statement, along with the necessary substantiation, you’re in the clear.

All of this is a lot easier with software that helps you track your deductions along with a dedicated business bank account, like Lettuce provides. This not only gives you a real-time centralized view of your business, but also makes all of your deduction tracking a whole lot easier.

…But are deductions a good tax strategy?

Deductions sound fun. But it’s important to remember that you’re still paying for the things you deduct and that they still cost your business significantly more than you’ve saved. 

Let’s use an example where you create a goal to spend $500 a month on client dinners so you can deduct them:

• Total Spent on Meals: $6,000 annually
• Deductible Amount: $3,000 (only 50% of business meals)
• Your Tax Savings: $750
• You Spent: -$5,250

Essentially, you end up saving 12.5% on the cost of your meal–that’s it. The waiter is making more in tips than you’re making in deductions. Furthermore, most of these deductions are limited or capped, like a $25 annual limit on gifts, per client.

You’re better off controlling your business expenses and minimizing your need to make these deductions. Are all of these meals necessary and driving incremental revenue for your business? Was it money you had to spend? 

You may also have seen questionable advice on social media that you should be loose with what you classify as a business expense, maybe sneaking in meals with family or general shopping. Advice like this might go viral, but it is fraud. The risk here far outweighs the benefit of saving a few hundred dollars.

At the end of the day, “maximizing your deductions” can become confused with spending more than you need to, or taking dangerous risks. The extra $1,000 in deductions you get by chasing 1,000 receipts–it's a death by 1,000 papercuts.

S Corps unlock a true tax strategy for solos

Let’s compare this to designating your business as an S Corp, allowing you to save on payroll taxes. Instead of incurring more expenses, you’re simply taking advantage of tax strategies that the IRS designed to help small businesses succeed.

• Example Income: $100,000
• S Corp Tax Savings: +~$10,000

Unlike focusing on deductions, a solid tax strategy like an S Corp lets you save more without spending more. You’re taking advantage of a special IRS tax designation, created just for businesses-of-one. The end result is that you can keep more of what you earn.

The problem with S Corps is that they can be a lot of work to manage and stay compliant if you’re trying to do it yourself. We built Lettuce to solve just that problem.

Lettuce makes managing your S Corp easy. It automates all the administrative work, letting you capture the tax savings you’re entitled to, without bogging you down in accounting. It’s the simple strategy.

Read up more on What Exactly is an S Corp or get started and create your Lettuce account today.

Curious if an S Corp is right for you?

Try the Lettuce Tax Calculator to see how much more you can take home each year.

See your savings