Tax Tips with MHCo – Part 2 Entertainment.
Welcome to the second installment in our five-part series – tax tips with MHCo. This series is aimed at small to medium businesses and is designed to increase understanding around some key tax topics that we often get asked about as well as educating businesses on a few common areas where they may be missing out on tax deductions that they are entitled to. In the first edition we discussed home office expenses, what is it, who can claim it, and how to calculate your home office. If you missed out, you can read the blog here: Today’s topic is Entertainment – What is it? What can you claim? And what can you only claim 50% off? Business doesn’t have to be all work and no play. There are many times in our business lives where we need to promote our business, our products and our services. We need to build contacts and we need to maintain our existing contacts and relationships. As well as this it’s important we keep our employees happy. How do we achieve all of these? Sometimes the answer includes ‘entertainment’. A couple of common examples of entertainment: As a general rule if an entertainment cost is helping you earn income in your business then it’s usually tax deductible. If not it’s likely to be personal (and therefore not tax deductible). Entertainment then has some very specific rules which help determine if the expense is fully tax deductible or only 50% deductible. Entertainment that is 50% deductible. Some entertainment expenses have a significant private element. If this is the case, then you can claim 50% as a tax deductible expense. Some common examples include: The cost of food and drink provided at the following venues is only 50% deductible. An exception to this is that light refreshments such as morning and afternoon teas are 100% deductible. Food and drink provided away from your business premise is also only 50% deductible. For example, taking a business contact to lunch at a local restaurant. (See below for examples of food and drink while traveling which is 100% deductible) Business expenses including food and drink consumed on the following are 50% tax deductible If you provide entertainment that fits into the 50% deductible category then supporting expenses are also only 50% deductible. An example could be the hire of crockery and music at the end of year Christmas function. As the Christmas function itself is only 50% deductible the supporting hire of crockery and music is also only 50% deductible. Entertainment that is 100% deductible. Some of the most common entertainment expenses that are 100% deductible are: If someone in your business buys a meal while travelling for business you can claim 100% of it. However, if there is an existing or potential client present only 50% is deductible. For example – Anna, an employee, travels to wellington to attend a training event. Whilst in wellington Anna purchases lunch and dinner on the business credit card. These meals are 100% deductible as they are consumed while travelling on a business trip and there are no business contacts present. If you put on a conference or training event that runs for more than 4 hours, then food and drink provided is 100% deductible. This Entertainment is 100% deductible unless your own business contacts have more chance of enjoying the entertainment than the general public. The cost of giving away freebies to promote the business is 100% deductible. However, if these are given to employees associated with you then only 50% is deductible. Business entertainment consumed overseas is 100% deductible. GST on entertainment GST can be claimed on entertainment – just like it can with other business expenses. However, you can only claim GST on the portion of the entertainment that is deductible. So if entertainment falls into the 50% category then you can only claim 50% of the GST. When Entertainment can’t be Claimed Above we’ve listed examples of entertainment that can be claimed. But where are some of the common areas that people try and claim entertainment when they shouldn’t? The easiest way to judge it is whether it helps you earn income. For example – Shouting yourself lunch (because you left your nice pre prepared sandwiches on the bench!) in your home town is not claimable as entertainment. These items are considered personal, as whether you were at work or not you need to eat, so it is not considered an expense that relates directly to making your business money. That’s a wrap As you can see entertainment comes in many forms and many situations. Listed above are some of the more common examples. If you are ever unsure about what you can claim, then contact your tax advisor. Next week’s topic is GST. What is GST? What items attract GST, and what items don’t? How do we calculate your GST to pay or refund due? Thanks, the MHCO team
Tax Tips with MHCo Part 1 – Claiming Home Office
Introduction What is ‘entertainment’? Can you make a claim for your home office? Welcome to the first instalment in our five-part series – tax tips with MHCo. The end of financial year (31 March 2016) has now come and gone and with that many business across New Zealand will be readying themselves for another round of financial statements and tax returns. If you don’t already have your information ready for your accountant, then you should be thinking about this very soon. This series is aimed at small to medium businesses and is designed to increase understanding around some key tax topics that we often get asked about as well as educating businesses on a few common areas where they may be missing out on tax deductions that they are entitled to Today’s topic is claiming home office as a business expense: A large number of people who own a small/medium sized business complete work from home. The most common example is when a business owner has an office set aside at home for completing work-related tasks. If this is true then you can claim a portion of your home expenses as a business related expense. If you don’t have an office or area dedicated to work use you can still make a claim for home office. To calculate this we would use different criteria such as time spent on income earning activities at home. For today’s example we are going to presume a dedicated office area has been set aside for work purposes. Example The first step is to work out the percentage of the work area compared to the total floor area of the house. Let’s say John, who owns his own company, has a dedicated work office at home which is 15m2 in total. The total floor area of the home is 100m2. So John has a work related office which is 15% of the total home. He can therefore claim 15% of certain home expenses. John works out that his total home expenses over the last financial year were as follows: Rates $3,000 Insurance $1,100 Power $1,800 Total (including GST) $5,900 GST $770 Total Excluding GST $5,130 If John is not GST registered, then he can claim 15% of the GST inclusive total being $885. If John is GST registered, then he can claim 15% of the GST exclusive amount being $769. He can also claim GST of $115 (15% of $770) Example continued – Mortgage interest John can also claim a portion of his mortgage interest (but not principal). There is no GST on mortgage interest so it’s best to calculate this separately. John looks at his loan statements and works out he has paid interest of $20,000 during the year. He can therefore claim 15% of this being $3,000. Example continued – Telephone costs As John’s home acts as the center of operations for the business he is entitled to claim 50% of his home telephone costs. By looking at his phone bills John works out he has paid $1,080 during the year. This includes $141 of GST. John can therefore claim $70 of GST (50% of the total GST) and $470 for income tax purposes (50% of the GST exclusive phone bill) Adding up John’s entire home office claim (presuming he is GST registered) we get: Home expenses $769 Mortgage interest $3,000 Telephone costs $470 Total claim $4,239 Based on the company tax rate of 28% this would result in tax savings of $1,187 plus GST to claim of $185 ($115 + $70). Other considerations: Claiming a home office expense requires the same record keeping as any other business expense. It is therefore required that you have and hold the invoices for the expenses you are claiming. You can no longer claim depreciation on your house as a part of your home office. You can however claim depreciation on capital items such as office furniture & fittings, shelving etc. If you renting, we can still claim a portion of your rent for your home office claim using the same principles shown above. Next week Entertainment explained – what is it? What can you claim? And what can you only claim 50% off? Thanks, the MHCO team