Business is not all work and no play. You can also claim the cost of entertainment to build up business contacts, keep your employees happy or promote your goods or services as an expense. If it’s helping you earn your income, it’s usually deductible.
It should be 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 doesn’t help your business earn gross income, it’s private and you can’t claim it as a tax deduction, even if you paid for it out of your business account.
50% deductible entertainment expenses
Some business-related entertainment expenses are 100% deductible. Others are set as 50% deductible because they have a significant private element. Even if you think that the private element was more or less than 50% of the expense, you can only claim 50% of the expense as a deduction.
In general, any entertainment away from work or out of usual work hours has a private element.
If you provide entertainment that’s only 50% deductible, you can only deduct 50% of any “supporting” expenses. For example running costs, repairs and maintenance for corporate boxes, holiday accommodation and recreational boats, hire of crockery, glasses, waiting staff and music.
Entertainment expenses and FBT
An entertainment expense where the benefits are enjoyed or received by employees may be subject to FBT. If it’s a business-related entertainment expense which is only 50% deductible, it isn’t subject to FBT. But there is an exception. FBT will be payable if the employer provides the 50% deductible entertainment and the employee can choose when and where to enjoy the benefit, or the benefit is enjoyed outside of New Zealand, and the benefit is not provided in the course of the employee’s employment duties.
100% deductible entertainment expenses
Some business-related entertainment expenses might look as though they are only 50% deductible, but specific rules mean you may be able to claim 100% of the expense. You need to check the rules carefully when there’s a mix of situations which have different rates.
Food and drink while travelling on business
If you or one of your employees buys a meal while travelling on business, the cost is 100% deductible. But you can only deduct 50% of the cost of food and drink consumed if the travel is mainly for the purpose of enjoying entertainment, or at a meal or function involving an existing or potential business contact as a guest.
Food and drink provided at a conference
You can deduct 100% of the food and drink you provide at a conference, education course or similar event that lasts for four consecutive hours or more (not counting meal breaks). If the conference is mainly for the purpose of entertainment the expenses are only 50% deductible.
Promoting your business, products or services
If you supply entertainment to promote a business or the business’s products or services to the public, you can deduct 100% of the costs. But you can only deduct 50% of the costs if the business contacts or employees of the business being promoted have a greater opportunity to enjoy the entertainment than the general public.
Secondary promotion costs
You can claim 100% of entertainment expenses which only form a secondary part of a trade display or function held to promote a business. To claim 100% of the cost of this expenditure, the function must be open to the public. A trade display does not need to be open to the public to claim 100% of the secondary expense.
You can deduct 100% of the cost of freebies promoting your business. You can only deduct 50% of the cost of freebies you give employees or people associated with you.
Entertainment for review
Entertainment which you provide to someone who’s going to review it for publication (eg, in a magazine, newspaper or on a website) is 100% deductible.
Entertainment as a business
If you provide entertainment in the ordinary course of your business at market prices or in an arm’s-length transaction, you can deduct 100% of the entertainment costs.
Entertainment supplied for charity
You can deduct 100% of the cost of entertainment you supply to the general public for charitable purposes.
Entertainment enjoyed or consumed outside New Zealand is 100% deductible. Note that New Zealand includes the waters around New Zealand.
Claiming for reimbursed entertainment expenses
An employee who pays for an entertainment expense upfront may get an allowance from their employer to reimburse them.
If an employee pays for entertainment that’s 50% deductible, eg, a meal for a potential business customer and you reimburse the employee with a tax-free allowance, you can deduct 50% of the allowance. A tax-free meal allowance paid to an employee working overtime is 100% deductible.
You can deduct 100% of any taxable entertainment allowances you pay your employee.
You can deduct 100% of expenses in promoting your business. But, if you receive an extra benefit, as are result of that promotion you have to deduct 50% of the value of the benefit from your expense deduction.
If you provide entertainment to an employee, and they contribute to the costs, you reduce your expense claim by the amount of the contribution.
Source: IRD Guide to Claiming Entertainment Expenses