5,000-Yen Standard for Entertainment Expenses After the Start of Invoicing
Introduction
Businesses that adopt tax-exclusive accounting for entertainment expenses of ¥5,000 or less per person that are excluded from entertainment expenses for tax purposes will need to be even more careful in determining the ¥5,000 standard after October 1, 2023. If food and beverages are consumed at a restaurant that is not an invoice-issuing business, the amount that is not included in the purchase tax credit must be added to the actual amount of the food and beverages before making a determination.
￥5,000 Standard for Food and Beverage Expenses for Business Entertainment
For tax purposes, expenses up to ¥5,000 per person for entertainment of clients, etc., can be excluded from entertainment expenses.
Some companies may apply this rule and account for food and beverage expenses of ¥5,000 or less per person as meeting expenses, rather than entertainment expenses.
The determination of whether the amount is less than or equal to 5,000 yen depends on the accounting method, with the amount including tax in the case of tax-inclusive accounting, and the amount excluding tax in the case of tax-exclusive accounting.
There will be no change to the ¥5,000 standard after the start of the invoice system. However, for businesses that adopt tax-excluded accounting, when food and beverages are consumed at a restaurant that is not an invoice-issuing business, the portion of the purchase tax credit that is not eligible for tax credit must be included in the main price.
Therefore, when eating or drinking at a restaurant that is not an invoice-issuing business, the 5,000yen standard borderline (limit) is no longer actually 5,000 yen.
In the case of eating and drinking at a restaurant that is an invoice-issuing business, the judgment will be made at 5,000 yen as in the past.
After October 1, What Are the Borderlines/Limits?
The borderlines for determining the ¥5,000 standard for in-store dining (applicable tax rate of 10%) at restaurants that are not invoice-issuing businesses on or after October 1, 2023 are as follows:
| Period | Borderline |
|---|---|
| From October 1, 2023 ~ September 30, 2026 | 4,902 yen |
| From October 1, 2026 ~ September 30, 2029 | 4,762 yen |
| From October 1, 2029 | 4,545 yen |
For three years from October 1, 2023, 20% of the amount equivalent to consumption tax will be included in the amount of consideration, so the limit per person will be "4,902 yen excluding tax (5,393 yen including tax)" and for three years from October 1, 2026, 50% of the amount equivalent to consumption tax will be included in the amount of consideration, so the limit per person will be "4,762 yen excluding tax (5,239 yen including tax)”.
The calculation formulas are omitted here because they are rather detailed. If you are interested, please see them for yourself.
The Burden on Businesses is Heavy
Although some large companies have modified Excel reimbursement forms related to food and beverages and have constructed a format that automatically determines the 5,000yen standard, inevitably there are situations in which entertainment expenses must be determined manually, and this is a heavy burden for businesses.
For small and medium-sized enterprises (SMEs) whose entertainment expenses do not exceed ¥8 million, it may be better to forget about the ¥5,000 standard and treat entertainment for clients, etc., as entertainment expenses regardless of the amount.
How Much Rent Does the Executive Pay for Company Housing?
Introduction
It is not uncommon for a family-owned company to lease a director's home as company housing for the director. In such a case, how much rent is reasonable for the director to pay?
One-half of the Contract Amount Acceptable
If the company leases company housing to a family director, consider how much rent the director should pay to the company.
Generally, a calculation method such as "the amount the company pays to the property owner ÷ 2" is commonly used, and if this method is used, tax issues usually do not arise.
However, there are cases where lower rents can be set even when tax issues do not arise. The Basic Income Tax Notice describes a calculation method based on the property tax base of the building and land.
Therefore, consider which is more advantageous: rent calculated based on "the amount paid by the company to the property owner ÷ 2”, or rent calculated based on the property tax base of the building and land as stated in the Basic Income Tax Notice.
The Basic Notice-Based Calculation is Often Advantageous
The rent calculated based on the property tax assessed value of the building and land as stated in the Basic Income Tax Notice is usually smaller.
This allows family directors to increase their take-home pay without increasing their executive compensation. In other words, it can be said that family directors can increase their take-home pay without increasing the nominal value of their executive compensation at all.
In reality, however, in many cases, "the amount the company pays to the property owner ÷ 2" is paid as rent.
The reason is that until about 20 years ago, only property owners had access to the property tax base for land and buildings; so renters/lessees couldn’t obtain the property tax base information.
In other words, there was actually a time when renting/leasing companies were forced to calculate the rent amount based on "the amount the company pays to the property owner divided by 2".
However, nowadays, information on the property tax assessed value of land and buildings is available to lessees as well.
Therefore, if a company is calculating rent payments according to the old method (“the amount the company pays to the property owner ÷ 2”), it should consider recalculating the housing rent.
Can be Transferred without Being Taxed
By reviewing company housing rent, funds can be transferred from the company to individual family officers.
Normally, when funds are transferred from a company to a director who is a family member, whether as salary or dividends, the amounts are always subject to income and residence taxes.
Executive corporate housing will be taxable if rented at extremely low rents, but won’t be taxable as long as it is handled in the manner described above.
How to Legitimately Make Income Statements Look Good
Introduction
Financial statements are very important in bank loan reviews. The financial statements include an income statement and a balance sheet, but what aspects of the income statement are looked at?
The income statement can legitimately be made to look better without any ‘window dressing’. Let's look at some specific ways.
Important Profits
The income statement lists the following “profits”:
(1) Gross profit (2) Operating income (3) Ordinary income
(4) Earnings before interest & taxes {EBIT} (5) Net income
Among these, (2) operating income and (3) ordinary income are considered to be the most important in a bank's loan screening process. These profits are considered more important than income before taxes (EBIT) or net income.
This is because it is operating income and ordinary income that best reflect the strength of a company. Income before income taxes and net income may not represent the company's normal earning power, because they are calculated taking into account extraordinary gains and losses that occur on an ad hoc basis.
Also, revenues (sales), which are listed at the top of the income statement, are considered important, despite not being profits. The larger the net revenues, the larger the size of the company, and therefore the larger the working capital and equipment funds requirements - thus, the easier it is to increase the amount of financing.
Legitimate Creativity
Given the importance the bank attaches to the above profits and sales figures, the following devices may be considered.
- Revenue that is about to be recorded in non-operating income that can be included in net sales will be included in net sales;
- If income is to be recorded as extraordinary income and can be included in net sales, include it in the latter. If the income cannot be recognized as sales, but can be recognized as non-operating income, it should be so recognized;
- If a cost is about to be charged to selling, general and administrative expenses and can be charged to extraordinary losses, charge it to the latter. If the expense(s) cannot be charged to extraordinary losses, but can be charged to non-operating expenses, they should be charged to non-operating expenses; and,
- Expenses that are about to be charged to non-operating expenses, but which can be charged to extraordinary losses, should be so charged.
By considering these four perspectives, it is possible to legitimately maximize sales, operating income, and ordinary income.
If these innovations are done legitimately, the income statement will look better, your company’s credit rating will be improved, and as a result, loan approval will be easier to obtain, which are positives for the company.
So What Exactly Do We Do?
For example, both non-operating expenses and extraordinary losses are expenses or losses that are not incurred in the company's core business. The difference between a non-operating loss and an extraordinary loss is as follows:
Non-operating loss
Expenses and losses that are incurred on an ongoing basis each period, or else are unexpected but small in amount
Extraordinary loss
Losses that occur unexpectedly and are large in amount
However, it is up to each company to determine the extent to which such expenses are considered ‘small’ in amount. Each company should consider whether any of the expenses it intends to record as non-operating expenses can be recorded as extraordinary losses.
