Looking To Write Off Meals And Entertainment Costs???
Many business owners believe that just because there is a line item on the tax return for meals and entertainment, every meal and theatre or sporting event tickets with clients, potential clients, or employees, qualifies as a valid deduction. But CRA puts limitations on what can be deducted and how much. Deducting meals and entertainment is not as easy or straightforward as it looks.
There are rules to deducting these expenses. The basic rule of thumb is, if you’re having way too much fun, it’s not a deductible expense.
Here are some guidelines to help you determine which is a business or personal expense.
1. Get down to business.
Here are some guidelines to help you determine which is a business or personal expense.
1. Get down to business.
Any entertaining you do must be directly related to the active conduct of your business, or be associated with a directly related discussion that precedes, or follows the meal or entertainment activity. So if we go out to lunch, and do not discuss tax planning strategies, sales projections, problems with your general ledger, etc, and only talk about family life, the lunch will not be deductible.
This rule also applies to throwing parties. Even if the goal of the get-together is to build goodwill, you can only deduct the cost of the party if you conduct business before, during or after the party. Meaning, you would need to include a product demonstration, reveal a new product or service, a sales pitch, or an educational talk related to your products and/or services.
2. Keep your wits about you.
The type of environment you are in also determines whether you can write off the activity or not. An overly-boozy brunch, for example, would not qualify for the deductions. Even if you discuss business after the brunch, you have to be careful. It might not be considered as a valid business meal, which is when you can potentially get into trouble.
3. Watch your guest list.
The guest list also matters when it comes to writing off party expenses. You may deduct 100% of your cost if the party is either open to the general public, or if it is for employees and their spouses.
On the other hand, if the party is for clients, potential clients, and/or independent contractors who work with you, then you may only deduct 50% of the cost. If there is a mix of employees and spouses along with clients and potential clients, you can allocate part of the cost as 100% write-off and the remainder as a 50% write-off based on the number of guests in each category.
4. Don’t go overboard.
On the other hand, if the party is for clients, potential clients, and/or independent contractors who work with you, then you may only deduct 50% of the cost. If there is a mix of employees and spouses along with clients and potential clients, you can allocate part of the cost as 100% write-off and the remainder as a 50% write-off based on the number of guests in each category.
4. Don’t go overboard.
Another rule of thumb in regards to entertainment is that it cannot be “lavish or extravagant”. Whatever your entertainment decisions, make sure it is within your company’s budget. If your bottom line is zero, you most probably will not be allowed to write-off first-class accommodations for potential clients in town for your party.
5. Build up your defenses.
If CRA comes to your door, be prepared to defend any deductions you make. For example, if you are having a party, make sure the invitation announces a business purpose, take pictures of your guests inspecting new products, or video clips. You can also keep a guestbook and have attendees sign, as well as track RSVPs. This way you can accurately provide the allocation of expenses between the different groups of people, such as employees, spouses, clients, children, friends, etc, who may not all meet the deductible criteria.
Basically, meals and entertainment costs can be broken down into three categories, based on the guidelines from CRA; 50% deductible, 100% deductible and not deductible at all. Costs that are 50% deductible include, business meals with clients or partners, and events where you are entertaining a client,
An expense may be 100% deductible in the instance if you are a self-employed individual, and incur reasonable meal expenses while away from home. For the client being billed for the costs, however, these costs will only be deductible at 50%. If you are a business owner, meals provided to employees during long shifts, or to keep them going during busy times are also 100% deductible. However, when claiming these expenses, they should be clearly marked that it was for employees, to ensure you are getting the full deduction when submitting receipts and information to your tax accountant.
Expenses not considered being part of a business-related expense, such as a personal lunch, where no aspect of normal business activities are discussed, would not be deductible, by any means.
To be safe ensure you keep receipts to support your claim. For more information, you can always visit the CRA website, as well as contacting us and we can always make things simpler for you.
Basically, meals and entertainment costs can be broken down into three categories, based on the guidelines from CRA; 50% deductible, 100% deductible and not deductible at all. Costs that are 50% deductible include, business meals with clients or partners, and events where you are entertaining a client,
An expense may be 100% deductible in the instance if you are a self-employed individual, and incur reasonable meal expenses while away from home. For the client being billed for the costs, however, these costs will only be deductible at 50%. If you are a business owner, meals provided to employees during long shifts, or to keep them going during busy times are also 100% deductible. However, when claiming these expenses, they should be clearly marked that it was for employees, to ensure you are getting the full deduction when submitting receipts and information to your tax accountant.
Expenses not considered being part of a business-related expense, such as a personal lunch, where no aspect of normal business activities are discussed, would not be deductible, by any means.
To be safe ensure you keep receipts to support your claim. For more information, you can always visit the CRA website, as well as contacting us and we can always make things simpler for you.