Deductible meals and entertainment expenses are amounts incurred to wine and dine current or potential clients, customers or suppliers.
The tax treatment of such expenditures is not the same as it is for the preparation of financial statements. Current tax rules only allow 50% of the cost of meals and entertainment to be deducted as well as 50% of the GST to be eligible for rebate. The 50% limitation is to reflect your share of the meal or entertainment expense. Therefore, for tax purposes, you are better off entertaining only one person at a time, as you will be able to expense the amount that is attributable to the client.
There are a few exceptions to the 50% limitation. A business is allowed to deduct 100% of the expenses for Christmas parties or similar special events if all the employees from a particular location are invited, to a maximum of six events each year. As well, if you bill your client for the meal and entertainment costs and show these amounts on their bill the expense is 100% deductible. Finally, attendance at a registered charity’s annual fundraising dinner would be exempt from the 50% rule.
To identify that the meal or entertainment expense was truly for business purposes, on the receipt identify the names of the individuals, the company represented, their relationship to you (i.e. customer, supplier), and the business purpose of the meeting. Examples include a meeting to increase sales, or to secure a better supplier. Revenue generated from that particular company, or significant purchases from a supplier should correlate to the meals and entertainment expenses incurred by that individual. For example, $2,000 in entertainment expenses relating to a client and only $50 of revenue generated from that client would signify that the expense is likely of a personal nature. Red flags are raised during an audit when there are names repeated regularly or no revenue is being received from that particular company, so to avoid suspicions being raised, ensure that your business meals and entertainment expenses are clearly documented.
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The information provided is of a general nature. As each individual or company’s situation is unique, you may wish to consult with your CPA for information specific to your own needs.