Meals are a standard part of the business. You’re taking a client to dinner or lunch to mention thank for his or her business. Otherwise, you buy a few pizzas to say because of your employees for a few great efforts getting the last job finished. Otherwise, you host a seminar and buy lunches for your attendees.
These are but three of the many possible situations where your company might buy meals.
What’re the right thanks to recording them in your books? The Canadian government changed the principles for meals bought by your company a couple of years back. They are not always treated in an identical way to other business expenses. Some meals are only 50% deductible for tax purposes.
I’m getting to summarize the principles we use to record meal purchases. For the official, accountant-needed, Canada Revenue Agency (CRA) way explaining the directions, I’ll suggest you visit their website.
Here’s my simplified explanation for small business owners. once we record a meal expense, it’s finished for three purposes:
To record the entire expenditure for the corporate.
To record the quantity of GST, which will be used as an ITC (see below).
To get ready for the year-end, when your accountant deducts only what’s permitted.
Meals That Are Fully Deductible
Not all meals a corporation buys are subject to the ‘50% rule.’ within the following situations, fully 100% of the meal cost is deductible:
Your business is to shop for meals and resell them, sort of a restaurant or caterer.
When your customer buys the meal as a neighborhood of something else (e.g., a conference) and you show that cost on their bill.
You include the value of the meal in an employee’s income.
You host an office party and buy meals (up to 6 times per year).
You buy meals when organizing a fundraising event for a registered charity.
You provide meals for an employee at a foreign location (e.g., construction camp).
Meals Only 50% Deductible
Simple: all other meals purchased by the corporate. Breakfasts. Lunches. Dinners. Coffee shops. Grocery. It doesn’t matter where you buy them. If not covered by the list above, your accountant can use only 50% of the value to scale back your income and hence your taxes.
Accounting for Input Tax Credits
If your company collects GST from its customers (and it must have a GST number to try to do so), then all or (more likely) a part of it’s to be sent to the CRA.
This is the entire amount collected minus the quantity of GST you paid a call at the course of doing business. The quantity you paid out is named the Input decrease, or ITC.
It sounds complicated, but it isn’t, really. For instance, one month, you collect $500 in GST from sales. And further, for example, you paid out $150 in GST for purchases associated with doing business during that point. The $150 is your ITC for that month. The difference, $350, has got to be remitted to the CRA.
Recording Meal Expenses
For meal expenses falling under the ‘50% rule,’ deciding the amounts can seem complicated. But it isn’t.
Your bookkeeping software has got to record GST separately. Are often “> this is often so your ITCs can be calculated to scale back the quantity of GST you’ve got to send the CRA.
Let’s say your restaurant meal costs $45.20. the five hundred GST is going to be $2.26. You add during a tip of $7.54 to form the entire a reasonable $55.00. How can we record it in your books?
First, we record the GST paid like $1.13, which is 50% of the GST charged. Only this half counts as an ITC. Then we subtract this from the entire and record $53.87 because of the cost of the meal.
What if you reside where there’s PST added, or HST is charged? Basically, it is the same thing. For instance, that PST (or the PST a part of the HST) is 8%. The total tax collected is now $5.88. the entire cost of the meal is $51.08. You add a tip of $7.92 for a reasonable $59.00. So, we record $1.13 for GST and $57.87 for the value of the meal.
In both examples, we accomplish our three goals: the entire expenditure is recorded; the eligible amount of GST used as an ITC is recorded, and; it’s accountant-ready.
What Happens at Year-End
When doing all of your company’s fiscal year-end, your accountant looks things over. For instance that he or she sees that the entire expenditure for meals is $920.50 with a complete GST of $19.80.
Well, first, because the GST amount is merely about 2% of the entire, he or she knows the bookkeeper has done an honest job. Only the portion of the GST eligible as an ITC was recorded.
And second, he or she is going to lower the number of deductible meal expenses by one-half to $460.25. But don’t worry; the complete total remains recorded, so you’ll see what the corporate spent on meals.
A professional bookkeeper knows the right things to record meal expenses. First, she knows which of them are fully deductible and which aren’t. Second, she knows the way to calculate and record the right amount of GST and total meal expenditure.
Getting these little things right during the course of the year makes your accountant happier because his or her job may be a little easier. You will be happy too because the value of your accountant’s work may be a little less as a result.