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Deducting Meals & Entertainment as Business Expenses

September 21, 2016

Taking out customers, suppliers or employees for a meal and some entertainment is a great way to build your business. Meals and entertainment for business purposes are a legitimate business tax deduction, but there are limits on what you can deduct … private entertainment costs are not tax deductible.

It should be reasonably clear when expenses are business-related or private. An entertainment expense is business-related if you spend the money to help your business earn income. If the expense is not connected to your business earning income, it’s probably private and can’t be claimed as a tax deduction, regardless of whether you paid for it out of your business account.

Some entertainment expenses are 100% tax-deductible while others are only 50% deductible.

Generally, food and drink provided away from your business premises is only 50% deductible. An example of this rule is where you invite a customer to lunch at a local restaurant to discuss business. You pay the bill of $100 but only $50 can be claimed in your income tax return.

An example of a fully deductible entertainment expense is food and drink consumed while travelling out of town on business, e.g. You buy lunch while travelling to Wellington on business – the cost is 100% deductible.

Because these expenses often happen while you are traveling, it may be difficult to keep good records, but it's important to record all details about the business purpose for these expenses. Note the business purpose on receipts, use an app, or take photos of receipts, and file all receipts so you can show then in case of an audit.

Deducting expenditure on gifts of food and drink

Inland Revenue have recently clarified that the 50% restriction applies to spending on things like chocolates or bottles of wine provided as gifts to customers, clients or suppliers. The example given is as follows:

Example

Bob is a real estate agent. Each time he arranges the sale of a house, Bob delivers a bottle of champagne to the owner. He also sends a gift basket by courier to the purchaser. The gift basket contains a bottle of wine, some cheese and various household items such as tea towels and soaps.

Bob will only be able to deduct 50% of the cost of the bottle of champagne. This is because he is providing entertainment in the form of drink and doing so off his business premises.

For the gift basket, Bob can deduct the full cost of the tea towels and soap, because an appropriate apportionment should be made for items that are not food and drink. However, he can only deduct 50% of the cost of the wine and cheese.

This differs from a previous ruling which indicated that the costs of food and drink in these circumstances were fully deductible. Now it seems that if Bob wants to claim a full deduction he will need to eliminate the wine, cheese & champagne and concentrate on tea towels and soap!

Fortunately, Inland Revenue have stated they will not be applying resources to identify deductions incorrectly claimed in previous years. This is because the amounts of deductions that may have been over-claimed are likely to be relatively small. However, over-claimed deductions identified in the course of an investigation or audit will be disallowed and the current view of the law applied.

If you are in doubt as to what deductions you can claim, please contact us.


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