Logs and Calendars
It’s the start of a new year. Often it’s introduced as a year of hope. We list those things we want to do and those things we want to avoid. In business, it’s the grand ‘to do’ list that will take us closer to our goals. Setting achievable goals and aiming just beyond them is the first step. Documenting the steps taken toward these goals can be helpful and, in an income producing venture, may be required legally for tax purposes and as a record of activities that may be provided to other parties you may conduct business with.
One tool most helpful is a simple calendar planner. We buy them with the best intentions and many of us find them mostly empty at the end of the year. An empty calendar at the beginning of a year holds much promise. We love buying them, much like a child on the first day of school. However, using one consistently is a practice that can be a challenge to master. A planner is a good and accepted method to document some types of business expenses and can also be used in tax audits to support these expenses. Below are some of the most commonly occurring circumstances.
Meals and Entertainment
While you’re only allowed 50% of this expense, a contemporaneous log of who you met with, what the purpose of the meeting was, and the location is required. The expense must be considered ordinary and necessary, therefore the purpose documented must be clearly written in your log.
Mileage
Tracking Business miles on your personal vehicle is something we all know we have to do, but consistently doing so is a challenge. Keeping it in your planner will keep your paperwork centralized. It is especially important you document the purpose of your trips if you have multiple businesses. Keep in mind, mileage can also be claimed for medical expenses and charitable volunteer activities. The deductible mileage expense rate will vary for different activities, so it is important to identify the mileage purpose for tax reasons.
Rental Activities
If you own rental properties which you manage yourself, you’ll have to track your time working on those properties. During the first few years of placing a property in service, there will often be greater taxable losses due to higher interest expense and depreciation. While many of us take advantage of the $25,000 (subject to limitations) special loss allowance, many find themselves in a bind during an audit because the loss is only allowed if you actively participated in the rental activity. Active participation is measured in hours worked managing the property during the year. The only evidence you’ll have will be your activity journal.
I won’t get into the details of passive activity losses here. It’s a complicated area of law that can take years of practice to fully understand. I only caution you to keep a record of your activities and the number of hours expended on each. If the property is held jointly by you and your spouse, your spouse will also have to keep a log of rental activities. Your planner is also a great place to log this time. Make sure your mileage to and from this property clearly indicates the expense is related to this activity and not to any of your other businesses.
If you find yourself in an audit without an activity log, you will be able to reconstruct this, but your memory can fail and your reconstruction may fail to capture all of the hours you worked and the government finds a contemporaneous record far more reliable during an audit. While the calendar is helpful in documenting your activities, its primary purpose is as a planning tool. Goal setting, time management, and prioritizing tasks, keep you on track to a more successful business.
Publication 463, Travel, Entertainment, gift and Car Expense
