You'll Regret Not Knowing This! "The Difference Between Meeting Expenses and Entertainment Expenses"
Do you have clear rules for distinguishing between meeting expenses and entertainment expenses?
Are they the same thing, just with different names?
I just lump them all together as entertainment expenses.
I hear comments like these from time to time.
However, these two types of expenses are completely different, and if you record them without a plan, you might become a target for tax audit guidance, or in some cases, end up losing money.
In our series "If a Dog Walks, It Might Hit a Tax - Things Every Business Owner Worries About at Least Once," we explain various tax-related matters that you might wonder about in daily life but tend to overlook. This time, we will explain the basics of tax accounting that apply to all corporations, sole proprietors, and freelancers: entertainment expenses and meeting expenses.
What are meeting expenses?
Expenses that qualify as meeting expenses
As the name suggests, meeting expenses are costs related to meetings. They are recognized as deductible expenses, and the following costs can generally be recorded as meeting expenses.
Meeting room rental fees
Costs for drinks, snacks, and bento boxes served at meetings
Printing costs for materials
Rental fees for equipment such as projectors
While the National Tax Agency has a clear definition for entertainment expenses, it does not have one for meeting expenses. Therefore, it is best to consider that "expenses used for business-related interactions that do not fall under entertainment expenses are meeting expenses."
There is no upper limit on the amount you can record, but...
Entertainment expenses have upper limits on the unit price per person and the total amount that can be recorded as a corporation. However, since there are no rules set by the National Tax Agency for meeting expenses, there are no such monetary restrictions. That said, you cannot record an unlimited amount. You should record them as meeting expenses within the bounds of common sense.
As I will explain later, there is a rule that food and drink expenses of 10,000 yen or more per person are considered entertainment expenses. It is appropriate to treat food and drink expenses of less than 10,000 yen per person as meeting expenses.
What you should do when recording meeting expenses
When recording meeting expenses (especially food and drink costs) as expenses, I recommend keeping a record of the following. This is because, due to the restrictions on entertainment expenses that I will explain later, it is more advantageous for companies to record them as meeting expenses, making them prone to being used as unreasonable tax-saving measures. Naturally, this is an item that tax offices check carefully. You need to be able to answer clearly when pointed out, "This amount is high, but was it really necessary for the meeting?"
Date when the food and drink occurred
Number of participants
Names and company names of the participants
Purpose of the meeting
It does not need to be a special document. Meeting minutes and the like should satisfy these requirements.
What are entertainment expenses?
Expenses that qualify as entertainment expenses
There is a clear definition for entertainment expenses. I will introduce it from the National Tax Agency website.
Entertainment expenses, etc., refer to entertainment costs, reception costs, confidential costs, and other expenses incurred by a corporation for the purpose of reception, entertainment, consolation, gift-giving, or other similar acts (hereinafter referred to as "reception, etc.") for its customers, suppliers, and other persons related to its business.
To summarize the above, entertainment expenses are those recognized for interaction with people outside the company, such as business partners involved in the business. Internal meetings and drinking parties are not included.
Furthermore, with the 2024 tax reform, food and beverage expenses of 10,000 yen or more were defined as entertainment expenses. In other words, if you are spending 10,000 yen or more on business-related food and drink but recording it as the aforementioned meeting expenses, you may be in violation of tax law.
Also, I recommend keeping a written record with details, just as with meeting expenses, so that you can clearly explain that the expenditure was business-related when a tax audit occurs.
In principle, entertainment expenses cannot be treated as business expenses, but...
Actually, under the law, "entertainment expenses are, in principle, fully non-deductible."In other words, the basic rule is that they cannot be treated as business expenses. This is because if entertainment expenses could be treated as business expenses, companies could easily compress their profits, allowing for large-scale tax avoidance.
However, the reality is that for companies, entertainment expenses are essential expenditures for sales promotion activities, and there are many businesses in the food and beverage industry that rely on them to operate. It has been decided that a certain degree of consideration is necessary, partly to encourage recovery from the COVID-19 pandemic and to improve the management of small and medium-sized enterprises.
Therefore, at present, it is specially permitted to include a portion of entertainment expenses as deductible expenses. Yes, the current situation is that "in principle, they cannot be treated as business expenses, but they are specially permitted."
Amount of entertainment expenses that can be treated as business expenses
As mentioned above, food and beverage expenses of 10,000 yen or more per person become entertainment expenses. Furthermore, there are clear rules regarding the total amount of entertainment expenses that can be treated as business expenses. Since there is a cap for corporations,if you record items that could be meeting expenses as entertainment expenses, you might reach the limit before you know it.
Sole proprietors: No limit
Corporations with capital of 100 million yen or less: Up to 8 million yen per year or 50% of food and beverage expenses
Corporations with capital of 10 billion yen or less: 50% of food and beverage expenses
Corporations with capital of over 10 billion yen: None (fully disallowed)
Check the non-deductible expense system
It is understood that the rules regarding entertainment expenses introduced so far will continue to be revised in the future. For example, the 8 million yen deduction limit mentioned earlier is set for a limited period of "three years starting from Reiwa 6 (2024)." Also, while I mentioned that food and drink expenses classified as entertainment expenses are those costing 10,000 yen or more per person, until last fiscal year, it was "5,000 yen or more per person." Frequent and significant revisions are being made.
The "non-deductible expense system" is particularly relevant to entertainment and meeting expenses. Since it will continue to be revised, please check it each time.
Conclusion
Meeting expenses and entertainment expenses are costs that affect everyone. As such, they are also expenditures that significantly influence tax revenue for the country. System changes will likely continue to be made while balancing social conditions and the country's fiscal situation.
Establish clear rules for usage within the company so that accounting staff do not get confused. Furthermore, keeping up with legal amendments individually is a laborious task, and for some business owners, it is not their most important duty. That is precisely why I would like you to rely on a tax accountant.
Hashimoto Tax Accountant Office supports those who take on challenges with the following missions:
"To be a financial partner that creates time for the president."
"To be a companion that supports the growth of the president."
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