If you are self-employed and either eat out or drive on the job, chances are you’ll want to deduct what you spend on those things. But meals and car expenses are two of the most likely things on your tax return to get scrutinized by the IRS, and who wants to organize hundreds of receipts for small dollar amounts? An easy alternative is to keep a spending diary–or two or three. A spending diary eliminates the need for you to keep tons of receipts for tiny amounts and is also one of the only spending records the IRS will accept as legitimate.
I have two spending diaries: a small notebook that I keep in my purse for meals/entertainment/public transportation, etc., and a pad taped to the dashboard of my car for mileage and car expenses. I recommend a separate diary for your car because it will be organized slightly differently than a regular diary. Some people like to use a digital or cassette recorder in lieu of paper (Blackberry/iPhone users, I’m looking at you) but either method is fine as long as it contains the proper information.
Like all documentation prepared for the IRS, a spending diary must follow a series of somewhat complicated rules in order to be admissible. Here’s how to set up an iron-clad meals and entertainment diary, for example:
- Include only entertainment and meals you ate out (not groceries!) that totaled $75 or less. You will need to keep a receipt for any meal or entertainment expense over $75 (no matter how many people you paid for).
- Create the following set of columns for your diary:
- The date
- The amount you spent
- Where you spent it (establishment and city)
- The names and business relationships of anyone you entertained
- The business you were doing or discussing
- Fill out the information the day you spend the money
For your car diary, just follow the format from this IRS example:
Tip: record the entries from your diaries into a spreadsheet every week when you do the rest of your bookkeeping. This will help you to budget future spending and will save you time when you need to prepare your taxes.