Understanding Entertainment Expenses: What's 50% Deductible and What's 100% Deductible

Navigating the intricacies of entertainment expenses for tax purposes can be challenging. In New Zealand, the deductibility of such expenses is governed by specific rules that determine whether an expense is 50% or 100% deductible. Understanding these rules is crucial for businesses to ensure compliance and optimise their tax positions.

50% Deductible Entertainment Expenses

Certain entertainment expenses are only 50% deductible due to their significant private element. These include:

1. Recreational Boats: Expenses related to yachts, launches, or similar recreational boats, including food and drink, are 50% deductible. For instance, if a business hires a yacht for a team event, only half of the cost can be claimed.

2. Food and Drink at Work: Costs for food and drink provided at social events on business premises, such as parties or in areas restricted to senior employees, are 50% deductible. However, light refreshments like morning teas are fully deductible.

3. Corporate Boxes and Holiday Homes: Expenses for corporate boxes at events, holiday homes, and similar leisure venues are subject to the 50% limitation rule. This includes associated costs like food and drink.

4. Gifts of Food and Drink: If a business gives gifts of food and drink that are enjoyed privately by the recipient, such as a bottle of wine to a customer, these are 50% deductible.

5. Entertainment with a Private Element: Any entertainment that occurs away from work or outside usual working hours, such as sports events or hiring a boat, is considered to have a private element and is thus 50% deductible.

100% Deductible Entertainment Expenses

On the other hand, some entertainment expenses are fully deductible, provided they are entirely business-related:

1. Business Travel Meals: Meals purchased by employees while travelling for business are 100% deductible, unless they involve a business contact or are part of a celebratory event.

2. Conferences and Courses: Food and drink provided at conferences or educational courses lasting at least four hours are fully deductible, unless the event is primarily for entertainment.

3. Public Promotions: Entertainment that promotes a business publicly, where the public has the same access as employees or business contacts, is 100% deductible.

4. Charitable Entertainment: Costs of entertainment provided for charitable purposes to the general public are fully deductible.

5. Offshore Entertainment: Entertainment enjoyed outside New Zealand is 100% deductible, as long as it is not within New Zealand waters.

Travel vs. Entertainment

It's important to distinguish between travel and entertainment expenses. Travel expenses, such as accommodation and transport costs incurred for business purposes, are generally fully deductible. However, if a trip includes a private element, such as a holiday, the costs must be apportioned accordingly.

Working from a cafe

If you're self-employed and usually work from home, you might wonder if you can claim the cost of snacks, coffee, or lunch bought while working from a café as a business expense. Generally, these meal expenses are considered private and not deductible because they are for personal sustenance. However, if the meal is part of a business meeting, such as entertaining a client, you can claim 50% of the cost as a business expense under the entertainment expenditure rules. This is because the meal then has both a private and business element.

In summary, understanding the distinction between 50% and 100% deductible entertainment expenses is essential for businesses to manage their tax obligations effectively. By keeping detailed records and understanding the nature of each expense, businesses can ensure they claim the correct deductions and remain compliant with tax regulations. For more detailed guidance, businesses should refer to the IR268 guide on entertainment expenses.