Following up on my previous rant about business expenses, I wanted to discuss the “Meals & Entertainment” expense category today. As we are all approaching tax season, I’m sure some of you keeners are going over your deductions from last year.
If you are especially diligent, you have kept ALL your receipts, including the personal ones. In that pile/envelope/mountain of papers, you’ll have a stack of restaurant receipts. Some of them will be dinners with the family, some drive through lunch breaks, and others will be meetings with clients.
If your preliminary indications show that you have a big cheque to cut the government in April (or June), it will be very tempting to blur the lines between what is business and what is personal. It will also be very easy to justify. You’re right, it’s unlikely that claiming the family night out at Swiss Chalet will trigger an audit. Heck, you might be able to get away with claiming ALL of your meals as business expenses.
But then again maybe you won’t.
Before we proceed, let’s lay out the rules for claiming meals. For our purposes, we are talking about deductions for your business, not eligible employee expenses.
The maximum amount you can claim for food, beverages, and entertainment expenses is 50% of either the amount you incur or an amount that is reasonable in the circumstances, whichever is less.
Entertainment expenses include tickets and entrance fees to an entertainment or sporting event, gratuities, cover charges, and room rentals such as for hospitality suites.
The rest of the details can be found here.
A couple notes on this. The 50% is the claim you make on your tax return. You still account for the full expense on your books. Also, if you charge GST, you are only able to claim 50% of the GST you paid for these expenses. Instead of trying to back out the ineligible taxes later, it’s better to properly record the transaction in the first place. Here’s a great article on how to do this in QuickBooks.
Ok, now that the quick lesson is done, let’s get back to the point.
If you make a habit of claiming ineligible expenses on your returns, it will eventually catch up with you. As soon as you’ve been flagged for an audit, you can guarantee you’ve just been put on a RevCan Naughty List. Not only does this mean you may have your previous returns audited, it also means you’ll probably be audited again in the future.
I have helped businesses through these in the past, and it’s a nightmare. So far the auditors have been very friendly, but EVERY minute detail of your business is examined. Any honest mistake you made will be viewed as an attempt at fraud. Simply put, you don’t want to have to go through this.
For 2011, here’s what I recommend.
Any time you spend money on a legitimate business meal, write notes on the receipt or on paper that you staple to that receipt. Include the name of the people in attendance, and a quick note about the topics discussed. Not only will this prevent you from claiming the wrong meals, but if you are audited, that level of detail will really impress the auditors.