Believe that every accountant has come across business entertainment expenses in their work, especially in jobs with frequent socializing, there are always a few dining invoices that are categorized under business entertainment expenses. But did you know that incorrectly categorizing business entertainment expenses can also lead to overpaying taxes!

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What is the difference between business entertainment expenses, travel expenses, and meal expenses?

First, it is essential to understand what business entertainment expenses are.

In simple terms, they have three characteristics: for the purpose of business operation, there is a business relationship between the company and the person being entertained, and reasonable expenditure. Does the personal hobby expenditure of the company owner count as business entertainment expenses? Many people would say "no," because it has nothing to do with business operations.

Having clarified the characteristics of business entertainment expenses, let's next distinguish them from other expense categories. There is no official document defining the scope of business entertainment expenses, so it is easy to confuse them with other expenses. The most easily confused ones are travel expenses and meal expenses. Now, let's make a distinction for these three expense categories.

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What is the difference between business entertainment expenses and travel expenses? For example, if a client comes to the company to discuss a project, and the accommodation expenses incurred are borne by the company, the accountant can categorize this expense as business entertainment expenses. If it is an employee of the company going to the client's company to discuss a project, and the accommodation expenses incurred are still borne by the company, then it must be accounted for as travel expenses. The difference between business entertainment expenses and travel expenses is that the former is for expenses incurred for people outside the company, while the latter is for expenses incurred for people within the company.

What is the difference between business entertainment expenses and meal expenses? Business entertainment expenses include meal expenses, but meal expenses do not necessarily belong to business entertainment expenses. Their relationship is illustrated in the figure below:An employee is required to travel to Guangzhou to accompany a client, and together they ascend the Guangzhou Tower. The leader instructs that all expenses should be self-funded, thus covering the transportation costs to the Guangzhou Tower, the admission fees for the tower, the dining expenses for entertaining the client after the visit, and miscellaneous costs for gifting commemorative items to the client, all of which are included in the business entertainment expenses.

However, how should we understand that "dining expenses may not necessarily be classified as business entertainment expenses"? The most common scenario is when a company provides free lunch to its employees, which is considered a dining expense but is accounted for as employee welfare expenses. When an employee travels for business, they need to eat, right? The dining expenses incurred during the trip should be accounted for as travel expenses.

What is the tax-deductible base for business entertainment expenses? According to the regulations on the implementation of the Corporate Income Tax Law published by the State Administration of Taxation, there is a provision that states:

As long as the business entertainment expenses are in compliance with the regulations, and do not exceed 0.5% of the current year's business income, enterprises can deduct 60% of the incurred amount before tax.

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Be aware of these tax risks associated with business entertainment expenses:

1. Misclassification of business entertainment expenses into other items can affect the value-added tax, corporate income tax, and personal income tax.

For example: Hua Wei Company, while maintaining client relationships, gifted a mobile phone to a client. The accountant did not record this as business entertainment expenses but instead as business promotion expenses. If the company's advertising and promotion expenses for the year are too high, exceeding the deductible amount, while the business entertainment expenses are still within the deductible limit, this could inadvertently increase the tax burden on Hua Wei Company in terms of corporate income tax and value-added tax.2. Expenditures that do not comply with regulations and are unrelated to the company's production and operation are also included in the business entertainment expenses.

According to the documents from the State Administration of Taxation, business entertainment expenses must be related to the company's operations. If the boss buys an air conditioner for the office, this cannot be considered a business entertainment expense and cannot be deducted before tax.

In a more unfortunate scenario, there is an expense that could be included in the business entertainment expenses, but if the invoice is not standardized, it also cannot be deducted before tax.

3. The deduction policies for business entertainment expenses during the establishment period are different from those during the normal period.

According to the Announcement of the State Administration of Taxation on Several Tax Treatments of the Taxable Income of Enterprise Income Tax (Announcement No. 15 of 2012 by the State Administration of Taxation), business entertainment expenses incurred by an enterprise during the establishment period that are related to the preparatory activities can be included in the enterprise's preparatory expenses at 60% of the actual amount and deducted before tax in accordance with relevant regulations.

According to the Notice of the State Administration of Taxation on Several Issues Concerning the Connection of Enterprise Income Tax Matters (Guo Shui Han [2009] No. 98), Article 9, where the opening (preparation) expenses in the new tax law are not explicitly listed as long-term deferred expenses, the enterprise can deduct them in a lump sum in the year it starts business, or handle them in accordance with the provisions of the new tax law on long-term deferred expenses, but once a choice is made, it cannot be changed.

That is to say, during the period when the subsidiary of Country Garden is building houses and needs to entertain investors, the expenses incurred during this period can be deducted according to the standards. If business operations have started, deductions must be made according to different regulations.

4. Expenses that have not actually occurred do not participate in the deduction.

For example, the accountant of Huawei Company calculated 3 million deductible business entertainment expenses based on the standard deduction amount of the annual income, but the actual business entertainment expenses were only 2.5 million, so the remaining 500,000 cannot be deducted before tax.

5. Business entertainment expenses that cannot prove their authenticity cannot be deducted.If the taxpayer cannot provide genuine and valid vouchers or information to prove that the expense indeed belongs to business entertainment expenses, the tax authorities will not approve the taxpayer's application for pre-tax deduction.

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Case Q&A

1. I bought 300 yuan worth of fruit for business entertainment. Whose ID number and name should be written on the voucher?

For the reimbursement application form, write the name of the person who is requesting reimbursement; for the receipt, write the name of the person who received the money.

2. Can the input tax amount of business entertainment expenses be deducted?

It cannot be deducted. Even if it is deducted, it must be transferred out as input tax.

3. Why does giving tea to customers involve business entertainment expenses?

If the tea is produced by oneself, it is considered as sales:Debit: Sales Expenses - Business Entertainment Expenses

Credit: Inventory

Credit: Taxes Payable - Value Added Tax (Output Tax)

If the tea is purchased externally:

1) A trading company selling tea gives some tea to customers when purchased,

Debit: Inventory

Credit: Taxes Payable - Value Added Tax (Input Tax)

Debit: Bank Deposit;When giving gifts:

Debit: Selling Expenses

Credit: Inventory

Credit: Taxes Payable—Value Added Tax (VAT) on Input Tax (Transfer Out)

2) Non-tea companies buy back tea to give to customers:

Debit: Selling Expenses—Business Entertainment Expenses

Credit: Bank Deposit

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5 legitimate tax avoidance methods for business entertainment expensesThe First Strategy: Correct Accounting of Business Entertainment Expenses

1. For the needs of business development, when entertaining clients for meals, the accounting should be classified under "Entertainment Expenses";

2. For meals in the staff canteen, group dinners, and overtime meals, the accounting should be classified under "Employee Welfare Expenses";

3. For meals taken during employee business trips, within the standard meal allowance, the accounting should be classified under "Travel Expenses";

4. For meals during employee vocational training organized by the company, the accounting should be classified under "Employee Education Funds";

5. For meals during company meetings held at hotels, the accounting should be classified under "Meeting Expenses";

6. For meal expenses incurred during the company's establishment period, the accounting should be classified under "Startup Expenses";

7. For cash meal subsidies distributed to employees, the accounting should be classified under "Salaries and Wages";

8. For meal expenses during board of directors' meetings, the accounting should be classified under "Board of Directors Expenses".9. Trade union organizations arrange employee activities, and the meal expenses incurred during the event are accounted for under "trade union funds".

Second strategy: Make full use of the deduction limit

1. Let the business entertainment expenses listed by the enterprise for the current period be Y;

2. Let the sales (business) income of the enterprise for the current period be X;

Then, according to the regulations, the amount of business entertainment expenses allowed to be deducted before tax for the current period is Y×60% and X×5‰, that is, Y×60% ≤ X×5‰. By calculation, it is derived that Y ≤ 8.3‰X, which means that when the business entertainment expenses listed for the current period are at the critical point of 8.3‰ of the sales (business) income, the enterprise may have fully utilized the deduction limit for business entertainment expenses.

Third strategy: Effectively divert business entertainment expenses

1. According to tax law regulations, the deduction limit for business promotion expenses is 15% of sales (business) income (30% for specific industries), which is 30 times (60 times for specific industries) that of business entertainment expenses, offering a larger limit space.

2. The purpose of business entertainment expenses is to maintain the relationship and image between the enterprise and its customers through necessary hospitality activities, thereby promoting sales. However, business promotion expenses also have a similar motive.

3. If effectively combined, the expenses between business entertainment expenses and business promotion expenses will play a good role in tax saving.

For example, enterprises often give gifts such as cigarettes, alcohol, tea, and local specialties to customers. These expenses should be included in the category of business entertainment expenses. However, if the enterprise changes to giving away products that it has produced itself or commissioned for processing, these gifts serve as a promotional role and can be accounted for as business promotion expenses.The Fourth Strategy: Accurate Accounting of Sales (Business) Revenue

1. Precisely understand the differences between sales (business) revenue as defined by tax law and the operating income recognized in accounting;

2. In accordance with the relevant provisions of the "Implementation Regulations of the Corporate Income Tax Law," when a business engages in non-monetary asset exchanges, or uses goods, property, or services for donations, debt repayment, sponsorship, fundraising, advertising, samples, employee benefits, or profit distribution, it should be treated as if it were selling goods, transferring property, or providing services.

For example, the following situations where a business transfers assets to others, due to the change in ownership of the assets, do not constitute internal asset disposal and should be treated as sales to determine income as stipulated.

(1) Used for market promotion or sales;

(2) Used for social entertainment;

(3) Used for employee rewards or benefits;

(4) Used for dividend distribution;

(5) Used for external donations;

(6) Other uses that change the ownership of assets.3. The items listed in point 2 are more reflected in the expense payment items in accounting. For example, assets used for market promotion or sales are generally recorded as sales expenses; assets used for external donations are recorded as non-operating expenses; assets used for employee rewards or benefits are recorded as payroll expenses, etc.

4. Enterprises should fully and correctly include these items as deemed sales income when declaring at the time of tax settlement, which can serve as the base for calculating business entertainment expenses. Income that is underreported or unreported by the enterprise and subsequently increased by the tax authorities shall not be used as the base for calculating business entertainment expenses.

Therefore, enterprises should truthfully declare deemed sales income to avoid the tax risks associated with underreporting or failure to report, and accurately determine the deduction base for business entertainment expenses.

Fifth Strategy: Establish Independent Accounting Branches

Business entertainment expenses are based on sales (business) income as the deduction base. Enterprises can increase the deduction base for expense limits by establishing independent accounting branches. For example, by setting up the sales department as an independently accounting sales company, and selling products to the sales company, which then realizes external sales, it can directly bring nearly doubled sales income, and the base for expense limit deductions can be increased. Establishing independent accounting branches can directly play a role in tax saving, but it will also bring additional management costs to the enterprise and may affect the overall strategic layout of the enterprise. Therefore, whether to establish such branches requires comprehensive decision-making.