A wonderful Christmas season is almost here, and Christmas parties are being planned. For any business, these times are just as important as the busiest time of the year.
Entertainment expenses have always been a bit of an ambiguous area for business owners and in-house accountants. If I was to give one suggestion it would be this: what may’ve been tax-deductible in the past, may not be anymore, things have changed.
Entertainment is part of your business, and this is fully accepted by the IRD. You can claim the cost of entertainment to build up business contacts, keep your employees happy, or promote your goods or services.
When you are spending money on entertainment, a good question to ask is this: If I spend this money, will I generate extra income? If the answer is yes, you may be able to get a tax deduction.
You can claim 100 percent of food and drinks you provide at a conference, education course or similar event that lasts for four consecutive hours or more.
You can claim 100 percent of the food or drinks if it’s a light meal, and consumed as part of the manager’s employment duties. For example: Once a month, senior managers at A2Z Ltd meet in their executive dining room to review the month’s figures. The light meal of sandwiches and fruit is 100% deductible.
You can claim 100 percent if you supply entertainment to promote your products or services, for example if you run a networking event with the purpose of promoting your business.
Another category of entertainment expenses is only 50 percent deductible because they have a significant private element. Even if you think that the private element was more or less than 50% of the expense, you can only claim 50 percent as a deduction.
Corporate boxes, marquees, tents or similar exclusive areas at cultural, sporting events or away from your business premises, are only 50 percent deductible.
You can deduct only 50 percent of the cost of food and drink you provide at your business premises, it may be a celebration meal or a party. This rule applies whether the entertainment is provided to staff or to guests invited from outside the business. Example: A2Z Ltd holds a Christmas party for its employees at work. The company can claim 50 percent of the costs.
Another area worth your attention is gifts of food and drink.
The IRD is clear that gifts of food or drink that will provide a private benefit to the recipient and a business benefit to the taxpayer are only 50 percent deductible. For example: Real estate agent Bob delivers a bottle of champagne to a client. Bob can only deduct 50 percent of the cost of that bottle.
Bob also sends a gift basket containing a bottle of wine, cheese and various household items such as tea towels and soaps. He can deduct the full cost of the tea towels and soap, because these items are not food and drink. But he can only deduct 50% of the cost of the food items.
And of course, if the expense doesn’t help your business earn extra income, it’s a private expense and no tax deduction will be allowed, even if you paid for it out of your business account.
Team building and social interactions with customers and suppliers are an important part of running a successful business, keep accounting for it correctly and keep building those strong successful relationships.
This article is substantially based on the IRD’s Entertainment Expense guide and if you have questions or just would like to say “Hi” please email: valerie@emeraldbusiness.co.nz
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