Be Careful to Not Make Mistakes When Processing Transportation Expenses Incurred on Behalf of Clients

Introduction

Although the criteria for "food and beverage expenses" to be excluded from entertainment expenses have been revised, the treatment of transportation expenses has not changed. Within the scope of entertainment expenses, there are many cases of misconceptions arising in regards to transportation expenses incurred on behalf of clients; such misunderstandings are often pointed out during tax audits. Let's confirm the correct treatment once again.

Maximum Deductible Food & Beverage Expense Increased to 10,000 Yen per Person

Due to tax reforms in 2024, the maximum amount of entertainment expenses that can be deducted as "food and beverage expenses" was raised from 5,000 yen to 10,000 yen per person.

This revision was made in light of rising prices and the soaring cost of eating out, and food and beverage expenses incurred on or after April 1, 2024 will be affected.

Points to Keep in Mind When Utilizing the Revisions

The increase in the upper limit makes it easier to include meal expenses in deductible expenses. However, only the direct cost of the meal or beverage itself can be treated as a food and beverage expense.

Service charges and extra charges are included, but venue rental, souvenirs, and travel expenses are not. Clearly state your company’s internal criteria for distinguishing between food and beverage expenses and entertainment expenses, and ensure that they are not misclassified when reimbursing expenses.

Transportation Costs Not Included in "Food and Beverage Expenses"

A particularly common problem during tax audits is the misclassification of transportation expenses. Cab or hired car expenses used before or after eating or drinking may be disallowed if treated as food and beverage expenses.

The National Tax Agency (NTA) defines "expenses incurred for eating and drinking" as the amounts directly spent on food and beverages, so transportation and travel expenses must be classified as "entertainment expenses, etc.".

Risks due to Misclassifications

If transportation expenses are reported as food and beverage expenses and included in deductible expenses, and if the expenses end up being denied at a tax audit, then additional or delinquent taxes may be imposed on the taxpayer as corporate and local tax bills.

Proper treatment focused on the nature of expenses is essential. Regardless of the amount, maintain internal rules and needed vouchers to explain the basis for the classifications of expenses.

It is Important to Draw up and Explain Rules within the Company

A reason for incorrect treatment of transportation and other expenses is that the people in charge of classifications, or officers, do not fully understand the tax rules. In particular, employees who attend business-related meals/events may incorrectly classify the expenses incurred when getting their expenses reimbursed.

Therefore, it is important for a company to clearly define the rules for which expenses fall under food & beverage expenses and which fall under entertainment expenses, and to provide thorough explanations to those concerned.

Due to this revision, it is easy for misunderstandings to arise, such as "Anything up to 10,000 yen can be deducted as a business expense.” Therefore, sufficient caution should be exercised.

By following the tax rules, a company can avoid unnecessary risks. If not only the accounting department, but also everyone involved with such meals, including salespeople and executives, understands the rules, it will lead to proper handling of expenses.

Summary

• The maximum deductible limit for food and beverage expenses has been increased to 10,000 yen, but transportation expenses are not covered.
• Only expenses directly incurred for meals and drinks should be treated as food & beverage expenses.
• Misclassification increases the risk of additional taxation. Please take precautionary measures through internal regulations and relevant employee awareness to ensure proper treatment.

Introduction of AI Tax Audits for Inheritance Tax Returns

Introduction

The National Tax Agency (NTA) will apparently begin using AI to conduct tax audits on inheritance tax audit cases selected with the help of AI; this will be carried out nationwide, from July.

Inheritance Tax Returns since 2023 May Be Selected by AI

 In recent years, AI has also been used in the selection process for corporate and income tax returns. In this latest measure, starting from July 2025, national tax bureaus nationwide will use AI to help determine whether or not an audit is necessary for data on tax returns submitted for inheritances that occurred in 2023 or later.

Increase in the Numbers of Tax Returns, and the Need to Strengthen the Audit System

Inheritance tax returns for approximately 150,000 decedents were filed for the year 2023. The taxable ratio (the ratio of tax returns filed to the total number of decedents) was 9.9%, and the number of inheritance tax returns filed is increasing every year. With the increase in the number of returns, the scope of audits has expanded, making it difficult to conduct comprehensive audits using only human resources. AI is expected to help streamline the selection process, and increase the number of cases that can be audited.

The “One-time” Risk Unique to Inheritance Tax

While corporate tax and income tax are levied every year, inheritance tax is levied only once - when an inheritance occurs. In order not to miss any cases that need to be audited, the NTA intends to strengthen its audit system through early determinations by AI.

Scoring Tax Risk

First, the NTA will collect data from all estate tax returns submitted by taxpayers from tax offices nationwide. The specific scoring process appears to be as follows:

[Data collection]

The NTA will centrally manage all inheritance tax return data submitted by tax offices nationwide.

[AI scoring]

For each tax return, the risk of underreporting or understatement of assets is evaluated on a scale of 0.00 to 1.00 (in increments of 0.01).

[Return of Scoring Data, and Resulting Judgments]

Scoring results for each inheritance tax return are returned to the respective tax bureaus, and the departments in charge will then determine, based on the scores, whether an audit is necessary for each case, and, if a tax audit is to be conducted, whether an on-site audit or else a simple contact such as via a telephone call is preferable.

Please note that if the AI determines that the tax risk is extremely low, such as a score of 0, the NTA may determine that an audit is unnecessary.

The AI uses as learning data cases in which tax returns with undeclared income or assets were pointed out in past audits, as well as statutory reports such as the Property and Liabilities Record. By extracting commonalities from this information, AI is likely to improve accuracy by identifying error-prone patterns, such as "failure to declare high-value overseas assets" and "deposit accounts in multiple names”.

This AI utilization initiative is a key measure of the National Tax Agency's efforts to improve efficiency and ensure fairness in tax administration. By introducing digital technology into tax audits, limited human resources can be maximized. In particular, since instances of filing inheritance tax returns are limited, the selection of appropriate tax audit cases via AI is very important.

Deductions for Purchases under the New Lease Accounting Standards

Introduction

Small and medium-sized enterprises (SMEs) are not subject to the new lease accounting standards. Nevertheless, we are concerned about whether the same treatment as before will be allowed for the consumption tax credit for purchases. How will the consumption tax credit for purchases change with the introduction of the new lease accounting standards? The tax treatment differs depending on the classification of the lease contract, so let’s summarize and confirm the main points.

As a General Rule, Finance Leases are Treated as Lump-sum Deductions

For tax purposes, a finance lease is considered to be a purchase and sale at the time the leased asset is delivered. Therefore, the lessee (renter) deducts the purchase tax expense in the taxable period that includes the date of delivery of the asset.

The new lease accounting standards change the accounting treatment of leases, such as the recognition of a right-of-use assets by the lessee, but do not change the tax treatment. Therefore, in principle, lump-sum deductions will continue to be applied to finance leases.

Continuation of Divisional Deductions for Lease Payments under Non-Ownership Transfer Leases

There are two types of finance leases: an "ownership-transfer lease" in which the title transfers to the lessee, and a "non-ownership-transfer lease" in which the title remains with the leasing company. Under an ownership-transfer lease, a lump-sum deduction is applied to the lease payments. On the other hand, if a lessee accounts for a lease without title transfer, the lessee is allowed to deduct the lease payments in installments for each taxable period in which the payments are due.

Handling by SMEs of Lease Payment Installments

Non-publicly traded SMEs that are not subject to the new lease accounting standards may continue to elect for the rental treatment for leases that do not transfer ownership of the leased property to the lessee. As long as they maintain this policy, they can continue to utilize the installment deduction, as before. When reviewing contracts over the medium- to long-term, considering the scope of application of the accounting standards together with the tax advantages and disadvantages is reassuring.

[Steps for companies under the new standards]

• Subject companies (listed companies and large companies): Lump-sum deductions are to be adopted for all finance leases.
• Enterprises that are not subject (unlisted small and medium-sized enterprises): may select the installment deduction option only if they account for leases that do not transfer ownership of the leased property to the lessee.

The Handling of Operating Leases

An operating lease will also recognize a right-of-use asset under the new standards. However, for tax purposes, the lease is still considered a rental transaction. Therefore, lease payments are still deductible as installment payments. Accountants should be aware of the differences between accounting and taxation to avoid omissions and  overlooked deductions.

Relationship between the contents of a lease and the application of the consumption tax credit for purchases (for SMEs)

Lease Details		Tax Credits for Purchases
Finance lease	Ownership-transfer lease	Lump-sum deduction
	Leases that do not transfer ownership	Split deductions are allowed if the lease is accounted for as a lease.
Operating lease		Installment deductions

As described above, the type of lease and its accounting treatment will affect the method of deducting taxes on purchases. Please check your company's accounting policy and the details of the lease contract, and select the appropriate deduction method.

When dealing with the new lease accounting standards, attention should be paid not only to the accounting treatment, but also to the deductions for consumption tax on purchases. Especially for SMEs, it is often possible to continue with the prior accounting method, but the applicable deduction method differs depending on the type of lease and the nature of the contract.