Food and Beverage Expense Limit Changed to 10,000 Yen after April
Introduction
For the first time in 18 years since the 5,000 yen standard for food and beverage expenses was established in the fiscal year (FY) 2006 revision, a review was conducted). The standard for the amount of food and beverage expenses to be reduced from entertainment expenses, etc. was raised to “up to 10,000 yen per person” (vs. 5,000 yen before the revision). We need to make sure to reconfirm the scope of food and beverage expenses, etc., in light of the above.
Implications of the Raised Level
The increase from 5,000 yen to 10,000 yen per person is of great significance to companies. It is expected that this will provide more opportunities to deepen relationships with customers and business partners, and create new business opportunities.
In other words, this amendment is meant to reduce the tax burden on companies and contribute to business efficiency. It is meant to support the economic activities of companies in the ‘with corona’ era, and help expand business opportunities.
Details of the FY2024 Amendment
In the 2024 tax revision, the following changes were made regarding entertainment expenses, etc.
- The standard amount for food and beverage expenses to be excluded from the scope of entertainment expenses, etc., is increased to up to 10,000 yen per person.
- The application deadlines for the ’50% deductibility of entertainment expenses’ special exception and the ‘fixed deduction limit (8 million yen per year) for small and medium-sized enterprises’ special exception were extended for three years - until the end of March 2027.
The special exception to the fixed deduction limit for small and medium-sized enterprises (SMEs) allows for deducting from expenses the amount of entertainment expenses, etc. paid (up to the fixed deduction limit of 8 million yen per year) by a corporation with capital of 100 million yen or less.
Effective Date of the Amendment
The amendment to exclude food and beverage expenses of up to 10,000 yen per person from the scope of entertainment expenses, etc. applies to food and beverage expenses paid on or after April 1, 2024.
Food and beverage expenses incurred prior to that date are determined to be deductible based on whether or not they are less than 5,000 yen per person.
The amendment’s application is not based on the fiscal year of the corporation. Rather, it is applied to food and beverage expenses paid on or after April 1, 2024. In other words, it is applied on the basis of food & beverage expenses.
Therefore, for instance, even if a company closes its books in December, there is no need to wait for the next fiscal year. The so-called 10,000 yen standard can be applied to food and beverage expenses incurred on or after April 1, 2024, which is during the current fiscal year.
Handling of Related Credit Card Payments
The definition of "eating and drinking expenses" under the 10,000 yen standard for food and beverage expenses is treated as if the expenditure being made for eating & drinking or other such action occurred "when the act of eating and drinking or other such activities took place”.
Therefore, even if the credit card payment for food and beverage expenses paid with a credit card in March 2024 for entertaining a client is withdrawn from one’s bank account in April, the deduction will be determined based on the pre-revision standard of 5,000 yen, not the new 10,000 yen standard, because the "timing of the action of eating or drinking" was in March 2024.
If Food and Beverage Expenses Exceed 10,000 yen
If the food and beverage expenses exceed 10,000 yen per person, it doesn’t mean that the portion up to 10,000 yen can be deducted as food and beverage expenses by excluding it from the scope of entertainment expenses, etc. Note that not only the portion exceeding 10,000 yen, but actually the entire amount, would then fall under the category of entertainment expenses, etc.
Tax Reform Related To Management Safety Mutual Aid
Introduction
The 2024 tax reform will revise the taxation system for Management Safety Mutual Aid (Mutual Aid to Prevent Bankruptcy). This will bring a new focus on Management Safety Mutual Aid, which has until now often been used for tax-saving purposes.
What is Management Safety Mutual Aid?
Management Safety Mutual Aid is a mutual aid system designed to protect small and medium-sized enterprises (SMEs) from falling into bankruptcy or financial difficulty due to a chain reaction caused by the bankruptcy of a business partner. Many of you may have heard of this program, called "Tosanbo" (i.e., Mutual Aid to Prevent Bankruptcy) for short.
In the event that a business partner goes bankrupt and accounts receivable become uncollectible, the company can borrow up to 10 times the amount of its premiums (up to 80 million yen) with no collateral or guarantors.
Monthly premiums range from 5,000 yen to 200,000 yen, and can be freely selected in increments of 5,000 yen. After enrollment, your company can increase or decrease its monthly premiums, or you can pay the full amount of one year's premiums in advance. Your company can also accumulate premiums until the total amount reaches 8,000,000 yen.
Originally-Intended Method of Utilization
Depending on the management of the plan after enrollment, tax savings can also be expected. Since all premiums are tax-deductible, your company can reduce its tax burden by paying a year's worth of premiums in advance in a fiscal year in which you make a profit.
However, the inclusion of premiums in deductible expenses is based solely on the assumption that the original purpose of the system is to “prevent chain-reaction bankruptcies".
Background Leading Up to the Revision
The reason for the 2024 revision was the fact that the funds were being used for tax savings, rather than for their intended purpose. All premiums paid for the Management Safety Mutual Aid system are deductible for tax purposes.
In the event a company cancels its enrollment, a cancellation allowance is received, but about one-third of all cases were cancelled at the time when the return rate of this cancellation allowance reached 100%, and there were a significant number of cases in which subscribers rejoined the plan after cancellation.
In other words, we can imagine that companies may have repeatedly saved on taxes by deducting the entire premium amounts, then receiving 100% of the cancellation allowances (at this time, we assume that another deductible was used), and then rejoining the system immediately after cancellation, to again save taxes by deducting the entire premiums.
This is nothing more than deferral of taxation, but it is clear that such actions are not in line with the original purpose of the system, which is to “prevent chain-reaction bankruptcies".
Details of the Revision
The details of the 2024 tax reform regarding Management Safety Mutual Aid are as follows.
- Premiums paid within two years of the cancellation (termination) date are not deductible.
- The above provision shall apply to cancellations on or after October 1, 2024.
It is clear that this revision is meant to completely block the above tax savings method.
Those who have a cancellation allowance return rate of more than 100% by September may consider cancelling and rejoining once, but some believe that tax losses or gains should not be the basis for management decisions.
Those who are already enrolled in the Management Safety Mutual Aid plan will need to make a careful decision based on this information.
Going from Rescheduling to Normalization of Repayments
Introduction
If a company’s business situation can be improved by rescheduling or updating a rescheduling, the company will move toward normalization of repayment. Let's take a look at what to expect when normalizing repayments.
Refinancing Considerations
After rescheduling with the bank, work to improve your business with a goal of resuming repayments. Consider resuming repayment once you are able to earn enough cash from your business to repay the loan.
Normalization is achieved if the repayment amount can be restored to the original amount prior to rescheduling. The amount of cash generated by a business is called “cash flow”, which is calculated by the bank using the following simple formula:
Cash flow = net income + depreciation and amortization.
However, if the original repayment amount is large, even if profits begin to rise, it is actually difficult to generate enough cash flow to get back to the original repayment amount. The idea is to normalize repayment by refinancing the loan with a longer repayment term.
Specific Examples of Refinancing
Example: Loan balance before rescheduling is 120 million yen, with a monthly repayment amount of 3.5 million yen.
Suppose that after the rescheduling, the company has worked to improve its operations and is now earning 1.3 million yen per month in cash from its business.
However, with a cash flow of 1.3 million yen a month, the original repayment amount of 3.5 million yen per month cannot be repaid.
Therefore, if the 120 million yen loan is refinanced, and converted to a 10-year repayment term, over the new 10-year period the annual repayment would be 12 million yen (120 million yen ÷ 10 years), or a monthly repayment of 1 million yen. While earning 1.3 million yen per month in cash from the business, it may not be possible to repay 3.5 million yen per month, but it would be possible to repay 1 million yen per month.
However, in order to normalize repayment through such a refinancing, an examination by the bank is required. In particular, the bank will check to see if the company can repay the loan without problems after refinancing.
Refinancing at Each Bank
If a company is refinancing to normalize its repayments, it should refinance with each bank it has loans with.
In some cases, a company’s main bank or a new bank may say, "We will refinance and underwrite everything," but if the company can refinance with each of the banks it utilizes, it’s better to do so - in order to maintain a structure that allows it to receive loans from multiple banks in the future.
Points to Keep in Mind When Refinancing
The estimated repayment period for loans through refinancing is 10 years for proprietary loans, and 15 years for guaranteed loans.
However, banks tend to shy away from loans with long repayment terms, and may require shorter repayment terms. But a shorter repayment period will result in larger monthly repayments, making it more difficult to manage cash flow.
You need to negotiate with the bank for a longer repayment period while determining how much your company is capable of repaying. Depending on the bank's assessment, it may be possible to normalize repayments by refinancing with an additional amount.
In addition, there is a possibility of receiving a new loan after about six months have passed since the normalization of repayments.
