Audit-Proof Tax Diary

Did you know that business lunches (and other meals) are 50% deductible? Many people think they are 100% deductible. But it is only 50%. However if you’re audited, and can’t prove that the lunch was for business, then the deduction might be allowed at all.

So how do you prove that it was a business lunch?
Will the IRS take your word? NO
Will a receipt prove it? NO.
Will the say so of your long lost brother’s uncle be sufficient? NO
What can you do to prove that a certain was for business? You can use the receipt to record the date, the time, who you went to lunch with, and what you discussed. That will be sufficient proof. Or you can keep a tax diary.

Most people think I am kidding when I tell them to keep a tax diary. They think a set of financial books will prove they are in business. But the IRS sees it differently.
A tax diary helps you prove that you want to make a profit. For the IRS to allow deductions, they have to see that you are running your business as a business, and NOT as a hobby. If the IRS determines that your business is in fact a hobby, you loose your deductions! The IRS wants to see businesses being pursued in a professional manner. A tax diary shows this.

Every person who works from their home should have a tax diary. This diary shows that you are working to make a profit. This is especially important if you are an independent contractor for any type of MLM, or network marketing company. It shows you are in business to make money; that you are not just a hobbyist who happens to make a few bucks.

A tax diary keeps track of WHO, WHAT WHERE, WHEN, and WHY you conduct business. Work can include calls to clients, business lunches, time spent paying bills, and of course time spent writing on your blog. It also includes thinking time while you come up with great digital marketing ideas, or research time spent to see if you want to be an affiliate for a certain program.

In other words, a tax diary keeps track of the time you spend working. It can also include mileage and entertainment expenses, which would be HOW MUCH you spent.

You can keep this tax diary in a simple, spiral-bound notebook. Or you can use a fancier day planning system. Or you can use a computer spreadsheet – which is what I do. You must record the things you do in your tax diary each day. The IRS rule is within 24 hours of the activity, when you have accurate recall.

I realize this doesn’t really have anything to do with digital marketing; however, I feel it is valuable information that I needed to share. There is more to running a business on the internet than just raking in the money.

So buy a notebook today. Get one with a cute cover. Write down what you do. Simple – and it will prevent a lot of headaches if you are ever audited.