This is the ultimate guide to tracking meals and entertainment expenses in your accounting software. Throughout this guide, we will use QuickBooks Online (QBO) to demonstrate how to set up custom taxes, and show you how to integrate LedgerDocs into your workflow for managing your receipts and posting them to QBO.
You are probably aware that for regular business related expenses, you can simply enter in the total expense into your accounting software (e.g. QuickBooks Online, Sage, etc.) along with the corresponding tax rate, and the software will calculate the taxes for you. This allows you to break out reimbursable taxes (i.e. input tax credits) such as GST and HST, while allocating other taxes like PST and alcohol tax as an expense.
Meals and entertainment expenses (M&E expenses) however, are a different animal since in many cases only 50% of the expense is eligible for a tax deduction. As a result, only 50% of the GST on that expense can be claimed as an input tax credit, which makes coding these receipts properly very important. Add in the fact that there is PST and tips, and you’re talking about something that has the potential to be very time consuming to calculate and adjust at period end if not done correctly up front.
This guide is broken into 4 parts, and we’ll show you how to do the following:
- Set up your tax codes in QBO
- Create group tax codes in QBO for easy tracking of meals and entertainment expenses and reimbursable taxes
- Streamline your data entry by posting meals and entertainment receipts from LedgerDocs to QBO, while simultaneously attaching a copy of the original receipt to the transaction
- Generate tax reports in QBO to verify results
(Step 1) Set up your tax codes in QuickBooks Online
For M&E expenses, 50% of the GST is allocated to the tax liability account while the second half goes to an expense account. New tax codes can be set up in QBO to make the data entry less complicated. In QBO, on the left hand side go to Taxes > Sales Tax > New Tax > Additional Tax Code
Here, we are setting up 2 additional tax codes to track 50% of the GST expense to the Tax Liability account, and the remaining 50% to the Meals expense account.
Example: (this will track 2.5% to GST and 2.5% to meals and PST)
- New Tax
- An additional group rate
- Tax code: M&E 2.5% PST
- Tax rate 1: 2.5% M&E (purchases); Applicable on: net amount
- Tax rate 2: NON ME 2.5 (purchases); Applicable on: net amount
- Add Rate
- Tax rate: PST (BC) Purchases; Applicable on: net amount
(Step 2) Create Group Tax Codes in QuickBooks Online
Once you have set up your new tax codes as above, the next step is to create a group tax.
In QBO, on the left hand side go to Taxes > Sales Tax > New Tax > An additional group tax rate
At this stage, there are different scenarios, depending on the company and expense type.
- Scenario 1 – combine the first 2 tax codes as recommended above into one group tax. This is for GST applicable only expenses
- Scenario 2 – when there is also PST, you will need 3 components for the group tax – the first 2 taxes as above, plus a 3rd tax for PST (assume this is already set up)
- Scenario 3 – there is no PST, but an alcohol tax replaces PST. In this case, it’s same as Scenario 2, using the alcohol tax set up separately depending on your province. e.g. 10%
Name the Group tax as appropriate (e.g. M&E combined with P) and click Done.
(Step 3) Posting meals and entertainment expenses to QBO from LedgerDocs:
- Connect your LedgerDocs account to QBO
- Create an expense from LedgerDocs and send it to QBO. As an example, we’ll use the following:
- Receipt is a meals expense for $127.00 total. This is made up of: $100.00 for the meal itself + GST ($5.00) & PST ($7.00), along with a $15.00 tip.
- First line item- Select the Meals & Entertainment expense account and enter the subtotal amount ($100.00) – choose the ‘group tax’ that was set up
- Second line item – Select the Meals & Entertainment expense account and enter the tip amount ($15.00) – choose ‘out of scope’ tax
Below is how it looks in LedgerDocs before being pushed to QBO. If you are posting directly in QBO, it’s handled the same way.
(Step 4) Generate reports in QuickBooks Online:
You should be able to see both the liability and the expense account for the transactions that contained tax, by either;
- Reports > All Reports > Mange GST / HST > Receiver General Tax Detail Report
- Sales Tax > Under GST/HST, Run Reports > Detail from drop-down
When filing GST in QBO we run GST Summary Report, GST Detail Report, and GST Exception Detail Report (for changes made to GST accounts in previously filed periods).
In summary, why this is important?
As a bookkeeper, you need to be aware how meals and entertainment expenses are handled in your client’s accounting software in order to accurately track your tax remittances and expense.
Some document management apps that rely heavily on automation to push receipts and expenses to accounting software do not support group taxes (or taxes at all), so this requires extra oversight and manual correction to the taxes in the accounting software.
If you set up taxes in QBO and add group taxes for tracking meals and entertainment expenses, LedgerDocs can recognize these group taxes up to 3 components, so you’ll be able to push those receipts right into QBO and also have your taxes get allocated and broken down correctly!
Do you have a great system? We would love to hear about it.
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