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Start the New Year Right with an Expense Diary

December 18, 2012

The IRS requires you to be able to substantiate your expenses either through receipts or an entry in a diary (or both).  If an item recorded in your diary is under $75, you do not need a receipt. Diaries are usually used for cash payments; however the person with you and reason for the expense needs to be documented. In today’s age of charge payments, fewer people are using cash and that is what needs to be documented carefully.




To be deductible, the cost must meet the following tests:


  • The business expense must be ordinary and necessary
  • The entertainment expense must be directly related to the conducting of business that either coincided with, preceded or followed the entertainment.  “Goodwill” entertainment is not deductible.  Note that only 50% of business meals and entertainment is deducible in most cases
  • The expense cannot be lavish or extravagant.  This is a subjective test that will be applied as individual agents define those activities.  What might be considered lavish or extravagant for one person might be considered substandard for someone else
  • The claim must be supported by proper substantiation


Items you can enter in your diary include:


  1. Business breakfasts, lunches and dinners
  2. Costs of taxis and local transportation for business, medical or charity purposes. Each taxi ride should be documented by a separate entry stating the starting point and destination and amount. Subway and bus rides could be lumped together at the end of each day
  3. Drinks and cocktails
  4. Business magazines and newspapers: these could also be totaled daily. If an expenditure exceeds a few dollars, some of the larger items should be listed
  5. Auto expenses: Gas and oil payments or minor repairs under $75 should be listed separately. Tolls could be totaled and recorded daily, but parking and car washes should be shown separately. In addition, the mileage of each trip, along with a record of your point of departure and destination, should be recorded. Transportation to and from your home is generally not deductible.  Under certain circumstances the IRS will allow a stan­dard mileage amount in lieu of records of auto expenses to cover depreciation, insurance, repairs, gas and oil.  You must keep accurate records of mileage, tolls and parking.  The standard mileage allowance for 2013 will be 56.5¢.  Note: Mileage rate for medical or moving driving is 24¢ and charity is 14¢ (the expression charity begins at home could have come about because of the low mileage rate that is allowed!)
  6. Theater tickets: As a business entertainment expense, these are also deductible. If you purchase the tickets and give them to a business associate, they would be deductible as an entertainment expense if it is related to the conducting of business before or after the entertainment. This is also subject to the 50 percent limitation. Otherwise, you can treat it as a business gift (see next item)
  7. Business gifts: These are deductible up to a maximum of $25 per year per recipient. Get receipts and make careful note of the recipient and the reason for the gift. Gifts over $25 are deductible for the first $25 only.  This documentation, as well as for other items, is needed even though you have a receipt for the charge payment
  8. Travel: Travel expenses for overnight business trips-including transportation, fares and hotels – are completely deductible. When traveling for business purposes, you do not have to be with someone else to get a deduction for your meals. Each item should be recorded separately in your diary. In this instance, do not lump expenses on similar items. For items over $75, you must get a receipt
  9. Other items, such as stationery, office or computer supplies, and photocopies
  10. Home entertainment: Lists of invited guests as well as those attending should be maintained along with a description of their business relationship, the reasons they were invited and the topics discussed.  A menu should be kept along with the receipts for the food, liquor and soda. If a waiter, bar-tender, or cleaning person is engaged, a record should also be kept of those payments, with receipts. The primary purposes of the gathering must be business oriented.


You do not need a formal leather-bound diary. All you need is some sort of record in which you make entries of your deductible expenses on a regular basis. It can even be a small notebook, pad or entries on your computer or mobile devise.


Diary entries must be made within a reasonable time after the expense is incurred.  My definition of reasonable time is within one week.


To meet IRS requirements for diary record keeping, remember to list these five elements for every entry:


1.   Who you were with (W)

2.   What was discussed (W)

3.   Where you were (W)

4.   When you were there (W)

5.   How much you spent ($)

Think of them as the

Four W’s and $ sign – W W W W $

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