Entertainment expenses are important costs for businesses to maintain good relationship with customers. However, tax deductibility is limited across the world because tax authorities think entertainment activity has an aspect of private expenditures. US IRS allows 50% of the expense to be deductible while any entertainment expenses are not tax deductible in UK.
Japan tax authority does not allow you to deduct except for some tax breaks.
Drink and food at the cost of ¥5,000 or less / person are 100% tax deductible. More than ¥5,000 / person are 50% tax deductible
- Only for drink and food e.g. restaurants and bars. Other entertainment costs such as golf and trips are not applicable.
- In terms of accounting treatment, there tax deductible expenses are still charged in the “Entertainment” account because its nature is entertainment activity. Do not choose “Meeting costs” just because it’s tax deductible.
SMEs with the capital of JPY100m or less are allowed to deduct entertainment expenses up to JPY8m.
- If the Company is 100% owned by a big corporation (with the capital of JPY500m or more), this tax break is not applicable.
Accounting vs Tax
The concept of entertainment in tax laws is wider than that of accounting. For example, expenses charged in “Employee welfare” in the financial statements can be judged “Entertainment expenses” in the tax return if you meet some conditions. You are required to collect such expenses recorded in other achttps://www.nta.go.jp/taxes/tetsuzuki/shinsei/annai/hojin/shinkoku/itiran2016/pdf/15.pdfcounts and declare in this form when you file a tax return.
Accounting wise, you just judge by the nature of transactions, and follow the charts of accounts.
Tax wise, you judge by the specific rules which are provided by the tax authority, and declare in the tax form. Here are typical cases where you wonder how to judge.
Costs of recreation events hosted by the company for employee welfare are booked in Employee welfare account. Employee welfare is tax deductible. However, some expenses are treated non-tax-deductible as “Entertainment” from the view point of tax treatment.
- Invitees are limited. => In terms of tax, such expenses has more private aspect. If costs are highly expensive, these are even treated as salary, which means that costs are tax-deductible but employees are taxed in its own individual income taxation.
Meeting costs such as lunch box served during the meeting are recorded in Meeting costs account. Meeting costs is tax deductible. However, some expenses are treated non-tax-deductible as “Entertainment” from the view point of tax treatment.
- Unusually expensive => In terms of tax, such expenses has more private aspect. There is no specific threshold for the amount.
If accountants find such transactions in books, you need to declare in the form above.