Entertainment Expenses when running a business

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 when it's time to work out your tax

The rules for entertainment expenses apply to deductions in your income tax return, though you may need to make an annual adjustment in your GST return

Business-related entertainment expenses

Very specific rules apply to different categories of entertainment. Some entertainment expenses can be fully deducted, while others can only be 50% deducted.

For example, the use of an "executive dining room" is one of the categories you can claim for, but the cost may or may not be fully deductible depending on how it's used. You may also have to work out if the expense is a fringe benefit.

A business-related entertainment expense may be 50% or 100% deductible.

Entertainment can mean food and drink, social events, trips, accommodation, privileges, musical, sporting or theatrical events, and freebies (free samples).

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.

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, or as a necessary consequence of, the employee's employment duties.

If you're registered for GST, the expenses in your income tax return must be GST-exclusive.

Keeping good records makes tax time a lot easier.

Note: The information is extracted from IR268-2018 published by IRD