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:
- Food and drink e.g. Shouting an existing or potential customer lunch and a coffee
- Social events e.g. end of year staff Christmas functions or client events
- Promoting our products or services
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:
- Food and Drink – 50%
The cost of food and drink provided at the following venues is only 50% deductible.
- Your business premises
- At a social event e.g. a Christmas party
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)
- Recreational boats – 50%
Business expenses including food and drink consumed on the following are 50% tax deductible
- Launch or
- Similar boat
- Supporting entertainment expenses – 50%
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:
- Food and drink whilst traveling or at a conference – 100%
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.
- Promoting your business, products or services – 100%
This Entertainment is 100% deductible unless your own business contacts have more chance of enjoying the entertainment than the general public.
- Giveaways – 100%
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.
- Entertainment overseas – 100%
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?