Given its range of functions and complexities, it is perhaps of no surprise that there are multiple approaches to it. One such approach is single entry accounting. But exactly what is single entry accounting? What are the advantages and disadvantages of it? Who should use it? How does it differ from the double entry approach? This article answers these questions and aims to tell you everything you [...]
Entertainment expenses for accounting and taxes
In almost every business there comes a time when those within the company ask themselves how to file business entertainment expenses. Regardless of whether you’re a huge multinational, a small company, or a freelancer, business meals are often a very important aspect of the general business activities. Occasions like this allow you to get together with customers, business partners, and even suppliers. It is here where relationships are fostered, new projects are started, and contracts are negotiated. And all this costs money – money which is tax deductible.
Usually, it is 50% of the overall bill that is tax deductible, but in some cases it can be as much as 100%, e.g. in the following situations:
- Meals that are provided for a company picnic or holiday party
- Any food or beverage provided to employees on the business premises (i.e. office snacks)
- Food made available to the public for free (i.e. an open house, exhibit or any other “promotional campaign”).
- Meals provided to more than half your employees for the convenience of the employer. This translates to providing meals to employees as an incentive to keep them working overtime or being on-call.
Of course, it goes without saying that in order to do this you need to have the correct documents and paperwork. However this is not the only reason that entertainment expense receipts are important. Every business, small or large, can be chosen for a tax audit. If on such an occasion, it turns out that business meals and other entertainment expenses have not been recorded correctly and cannot be backed up with the relevant receipts, then this can lead to serious problems with the tax authorities. In this article we have summarized the most important information relating to entertainment expenses.
What are entertainment expenses receipts?
An expense receipt is a document containing details on hospitality expenses that have been carried out for business purposes, e.g. a business meal. Technically speaking, entertainment expense receipts belong under the category of supporting documents, which are normally provided by an external party, in this case, the restaurant. Tips and service charges are also subjected to this 50% rate, as are the fees for hiring a room and any parking charges. If you wish to fully comply with accounting and tax standards then it is imperative that you are in possession of all the correct expense receipts and paperwork.
According to IRS Publication 463 there are two different methods for assessing whether a meal and entertainment expense is business-related: the directly related test and associated test. Directly related means that the main purpose of the entertainment was to actively conduct business, which you then engaged in during the course of the event, and that you had an expectation of gaining future income or another business specific benefit as a result of the entertainment. In other words, the main purpose of the entertainment was the active conduct of business. There is also the option of the associated test, wherein there were still clear business purposes for organizing the event, or that the event took place immediately before or after a substantial business-related discussion. Substantial, in this case, means that it involved discussion on a business transaction or some other activity that is specific to your company. The IRS does not specify how long such a meeting needs to be and also makes sure to point out that it is not necessary for business to be discussed during the meal or entertainment.
As mentioned above, along with food and transport, things like tips, coat check, as well as cover charges for admission into a nightclub can also be deductible along with entertainment expense receipts. However travel and overnight costs are not included – although it may be worth bearing in mind that these could be subject to the Department of Transport’s “hours of service” legislation. Of course, if it is the case that you are hosting guests in your office space then coffee and snacks, etc. are also tax deductible.
When it comes to expense receipts it is often the case that tax auditors will examine very carefully whether such an event was actually for private purposes or business purposes. This is because it can sometimes be quite difficult to differentiate between the two, particularly when you compare it to other possible business-related expenses. Since it is the case that client relationships are often fostered and maintained over dinners and such, then it is inevitable that this may sometimes lead to a certain degree of overlapping. That’s why it is of even greater importance to make the reason for the occasion as clear and as plausible as possible.
When filing such an entertainment expense, it is also crucial that you differentiate between a client event and one organized for employees. Take the example of a party: if it is just for you and your employees then there is a good chance that it will be fully tax deductible. But if you go another step further and invite clients to the event, then in order to benefit from entertainment expense deductions, you will need to prove that the main reason for having the event was, as outlined above, to conduct business, foster client relationships, etc. In this case you will be entitled to claim back 50% of the clients’ mean and entertainment expenses. But bear in mind that once someone who is not an employee is present, then you will need to be very careful and exercise extreme caution.
Another very important difference when it comes to business entertainment expenses is the amount of the bill. The crucial number is $75. If the cost of the meal, etc. is more than $75 then it is necessary to have documentary evidence, i.e. a receipt, voucher, or copy of a bank statement (if you used a credit card). Entertainment expenses that cost less than $75 do not legally require the receipts to be saved and the amount can simply be added to the total sum of business meals in the yearly or quarterly accounts. However it is still recommendable that you hang onto all receipts, no matter what the final sum is. This will make your life much easier if you do happen to be subject to a tax audit.
What should be on an entertainment expense receipt?
If it is the case that the expense receipt does indeed exceed $75 then a simple receipt from the restaurant, bar, etc., is not sufficient as documentary evidence for the event. Your paperwork should include all of the following:
- Name, location of the restaurant, date, and amount (if not printed on the receipt)
- Number of people served
- Receipt must show any other items besides food and beverages if purchased
- Purpose of the meal or entertainment
Further tips for meal and entertainment expense receipts
When filing business entertainment expenses there are a couple more things to take note of:
- The receipt should always be printed – handwritten receipts and confirmations should generally be avoided.
- If you are unsure whether the expense receipt is enough then you may want to make sure you archive additional proof that the event took place. This might include emails that were sent to participants or even the itinerary for the day of the event.
- In principle, the occasion and associated costs should be roughly in proportion to one another. This means that costs should not be too excessive so that the auditor sees the amount spent as reasonable.
- It is always recommendable that you sign each expense receipt.
As outlined above, tips are also a very important part of business meals and entertainment expenses, and, therefore, should not be forgotten when it comes to the expense receipt. If you are a business that often entertains clients, then the money spent on tips can really begin to add up. It can often happen that the bill is paid with credit card and then the tip in cash. In this case, it is possible to write up a supporting document to take care of this additional aspect. It’s a good idea to write the amount of the tip on the receipt and get the server in question to sign it, ensuring as well that the server’s name is also on the receipt.