Receipts in a foreign currency: converting expenses to US dollars for the IRS

A client meeting in London, a coworking pass in Lisbon, software billed in euros: foreign-currency costs are routine for freelancers and anyone who travels for business. Your return is in US dollars, so each of those amounts has to be translated, and the IRS has a rule for it.

The rule is short. The part people skip is keeping enough to show how the dollar figure was reached.

Which exchange rate to use#

For most people, it's the rate on the day the expense was paid. Sources the IRS points to include the US Treasury, the Federal Reserve and commercial sites such as Oanda and XE. Any posted rate is fine, as long as you use the same approach every time rather than picking whichever gives the bigger deduction.

The IRS also publishes a table of yearly average exchange rates, which shows how to convert: divide the foreign amount by the rate for that year. The general rule is still the rate prevailing when the item was paid, so note which rate you used for each expense.

The main exception is a qualified business unit with a functional currency other than the dollar, typically a separate foreign branch that keeps its own books. If that's not you, the dollar rules apply.

What your card statement adds#

If you paid by card, your statement shows the dollar amount that actually left your account, plus any foreign transaction fee. That's strong evidence of payment and of what the expense really cost. Keep it with the receipt.

The statement alone doesn't show what you bought, and for business expenses the IRS wants to see the amount, the date, the place and the business purpose. The receipt covers most of that.

Travel receipts and the $75 rule#

Foreign costs are often travel costs, and travel has its own substantiation rules. You need documentary evidence, such as a receipt, for any lodging expense and for any other expense of $75 or more. Below that, you still need a record of the amount, date, place and business purpose. See the IRS $75 receipt rule for how it works.

Receipts in another language#

A receipt in Japanese or Portuguese is still a receipt. The risk is not being able to explain it later, or misclassifying it now because you couldn't read it. Keep a translation of the key details: the vendor, what was bought, the date and the total.

What to keep for each foreign expense#

• The receipt or invoice, in its original language.
• Proof of payment, such as the card statement in dollars.
• The exchange rate you used and its source.
• The business purpose, especially for travel and meals.

Keep records for at least 3 years from filing, and longer in the situations covered in how long to keep receipts for the IRS. For self-employed deductions, see Schedule C receipt requirements.