what is representation expense

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Expense accounts

refer to costs incurred in conducting business. Technically, expenses are "decreases in economic benefits during the accounting period in the form of decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to equity participants".

Expenses Explained

From the technical definition of expense, we can draw the following points:

• Decrease in benefits during the accounting period - Expenses are measured from period to period, and results in a decrease in economic benefits.
• Decrease in assets or increase in liabilities - The decrease in economic benefits mentioned above could be in the form of a decrease in assets or an increase in liabilities. When a company incurs an expense, it pays cash; thereby decreasing assets. Besides cash, the company may also use other assets in paying expenses. It may also incur in a liability in cases of accrued expenses ( unpaid expense s).
• Decrease in equity, other than distributions to equity participants - There are only two elements that decrease equity: distributions to owners (i.e., withdrawals or dividends) and expenses.

List of Expense Accounts

• Purchases - cost of merchandise acquired that are to be sold in the normal course of business. At the end of the period, this account is closed to Cost of Sales.
• Freight in - If the business shoulders the cost of transporting the goods it purchased, such cost is recorded as Freight-in . This account is also closed to Cost of Sales at the end of the period.
• 2. Advertising Expense - costs of promoting the business such as those incurred in newspaper publications, television and radio broadcasts, billboards, flyers, etc.
• 3. Bank Service Charge - costs charged by banks for the use of their services
• 4. Delivery Expense - represents cost of gas, oil, courier fees, and other costs incurred by the business in transporting the goods sold to the customers. Delivery expense is also known as Freight-out .
• 5. Depreciation Expense - refers to the portion of the cost of fixed assets (property, plant, and equipment) used for the operations of the period reported
• 6. Insurance Expense - insurance premiums paid or payable to an insurance company who accepts to guarantee the business against losses from a specified event
• 7. Interest Expense - cost of borrowing money
• 8. Rent Expense - cost paid or to be paid to a lessor for the right to use a commercial property such as an office space, a storeroom, a building, etc.
• 9. Repairs and Maintenance - cost of repairing and servicing certain assets such as building facilities, machinery, and equipment
• 10. Representation Expense - entertainment costs for customers, employees and owners. It is often coupled with traveling, hence the account title Travel and Representation Expense .
• 11. Salaries Expense - compensation to employees for their services to the company
• 12. Supplies Expense - cost of supplies (ball pens, ink, paper, spare parts, etc.) used by the business. Specific accounts may be in place such as Office Supplies Expense , Store Supplies Expense , and Service Supplies Expense .
• 13. License Fees and Taxes - business taxes, registration, and licensing fees paid to the government
• 14. Telecommunications Expense - cost of using communication and telephony technologies such as mobile phones, land lines, and internet
• 15. Training and Development - costs for the enhancement of employee skills
• 16. Utilities Expense - water and electricity costs paid or payable to utility companies

And others, such as Accounting or Bookkeeping Fees , Legal and Attorney Fees , etc.

Expenses are deducted from revenues to arrive at the company's net income .

Expenses refer to costs incurred by a company in conducting business. Examples are: Cost of sales Advertising Expense Bank Service Charges Delivery Expense Depreciation Expense Insurance Expense Interest Expense Rent Expense Repairs and Maintenance Representation Expense Salaries and Wages Supplies Expense License Fees and Taxes Telecommunications Utilities Expense, etc.

More under Accounting Elements

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• By Bea Naveros
• January 3, 2024
• Expense Management

How to manage representation expenses?

One of the most common strategies used by companies to maintain relations with other organisations and improve their image is to carry out activities to increase their visibility. These actions involve representation expenses and it is important to take them into account when managing the company’s budget. Below, we will explain what exactly representation expenses consist of, their characteristics and information to be taken into account.

Table of Contents

1. What are entertainment expenses?

Representation expenses are associated with the activities carried out by the company to improve and consolidate its corporate image , as well as its actions to strengthen links with suppliers and customers for commercial purposes.

These expenses are usually closely linked to the organisation’s public relations or sales and marketing actions . They are executed by the employees of these departments, and often also by the senior management of the organisation.

1.1 Differences between travel expenses and entertainment expenses

There is frequent confusion between travel expenses and entertainment expenses.

The main difference between these two concepts is that the former are intended to represent the company by organising a corporate action , whereas travel expenses derive from the employees’ work activity , such as subsistence, transport or accommodation of the employee during the working day.

The problem is that the same commercial or marketing action , for example, can include both types of expenses , and this is where the confusion arises.

For example: a company invites a foreign client to consolidate its business relationship and thus increase exports. The company has booked a hotel , will have dinner with the client at a well-known restaurant and, between meetings, the sales manager will accompany the client to a sporting event . All these expenses can be charged as entertainment expenses .

But what if, on the other hand, it is the sales manager who goes to visit the customer in his home country ? In that case, transfers and accommodation should be counted as travel expenses , and only if the manager invites the customer to lunch can the invoice be counted as a representation expense .

The line is quite fine and sometimes causes reasonable doubt , but a trick to correctly separate the two expenses during the same business mission is to ask yourself this question: is this expense part of my business activity or is it for a third party?

Some examples of representation expenses that companies can count as such are the following:

• Business lunches and dinners with clients (actual or potential), suppliers, collaborators or partners.
• Transfers and hotel accommodation for these business partners.
• Business gifts .
• Invitation to leisure activities such as sporting events, shows or wellness sessions.
• Registration for training sessions , among other training activities.

2. Corporate tax-deductible entertainment expenses

In the broad sense of the term, representation expenses can be infinite , as there is no limit to the imagination of marketing or sales managers when it comes to creating events to promote products or reinforce a brand.

However, for tax deduction purposes, the list is much shorter and therefore only those expenses specified by law are deductible. This is why you need to be careful to know when you are incurring such an expense and when it does not fall into this category for deduction purposes.

2.1 Types of deductible expenses

The three main types of representation expenses that companies can deduct from corporate income tax are as follows:

• Expenses to improve relations with clients or suppliers, such as gifts , invitations to restaurants, hotel accommodation , registrations for conferences and courses , the purchase of tickets for cultural or sporting events or even personal care services.
• Expenditure aimed at strengthening employees’ sense of belonging to the organisation in accordance with customs and practices . Typically this is the Christmas hamper, although other types of small gifts to employees on special occasions can also be included.
• Corporate expenses for the promotion of the company’s products or to reinforce brand positioning . This category also includes the company’s participation in activities aimed at reinforcing synergies in a given economic sector , in collaboration with other companies in the same field. For example, the creation of events , attendance at sectoral fairs or the organisation of conferences and seminars .

2.2 Non-deductible expenses

However, not all business expenses are deductible . In order to make a more precise distinction and avoid confusion, we see that the law governing corporate income tax mentions a number of non-deductible expenses :

• Losses caused by gambling .
• Fines and penal or administrative sanctions .
• Pension plans and funds.
• Expenses arising from actions against the law.
• Payments to services or persons resident in tax havens .
• Expenses arising from the management of accounts, specifically those of corporate income tax .
• Donations or other unnecessary expenses to carry out the business activity.
• Remuneration of shareholders’ equity
• Business meals at private homes.

2.3 Limits on the deduction of representation expenses

Article 15 of Corporate Income Tax specifies that it is only possible to deduct a maximum of 1% of the net turnover in that tax period .

In addition, it should be remembered that expenses that are not intended to generate future business profits are not eligible for tax relief. Some examples of this are inviting people not related to the company to a restaurant for a meal or the purchase of tickets to events or shows for friends or family members.

3. Accounting for entertainment expenses

Within the chart of accounts , we can see that entertainment expenses are included in group 6, which comprises all expenses for the financial year, and within this, in subgroup 62 , which refers to services of a diverse nature. Finally, we find account 627 , which includes advertising, publicity and public relations expenses.

4. How to recover VAT on entertainment expenses?

Within the tax framework, entertainment expenses have their own particularities . The basic requirements of the AEAT are as follows:

• The expenses must be linked to the economic activity carried out by the company.
• They must be properly justified and accompanied by the corresponding invoice.
• They must be recorded in the company’ s accounts .

For example, in the case of a meal with clients or suppliers, which is one of the most common representation expenses, the following data must be recorded:

• The reason for the expense.
• The number of participants .
• Name, date and type of event.
• Full invoice details: company, VAT number, company name, concept, taxable base and tax rate.

In short, in order to recover VAT on entertainment expenses, it is necessary to collect all the information that can explain the reason for the expenses incurred in a concrete and specific manner, thus being imputed in the corresponding accounting record and demonstrating that these expenses have a business purpose .

However, even with proper documentation, excessive expenses are often not accepted , as the regulations are particularly inflexible .

5. Management of entertainment expenses

Some companies use traditional Excel spreadsheets to manage business expenses, including entertainment expenses. This involves collecting invoices and receipts and manually entering the relevant data. These then have to be bank reconciled and entered into the company’s accounting system for processing, settlement and subsequent deduction of VAT. This is a time-consuming and costly process for companies and often leads to many data entry errors .

Automating the process of managing representation expenses will provide the company with a new and practical way of working and making savings . The company will have more control over the employee’s expenses, and will even be able to detect irregularities or cases of internal fraud . In addition, the company will have an overview of the representation expenses, drastically reducing additional administration costs.

For this reason, many companies opt for automated expense management through the use of technological tools designed specifically for this purpose .

6. Benefits of digitising the management of representation expenses

Solutions such as Tickelia are available on the market that manage the entire process of expense notes and business travel from start to finish : from advances to ERP accounting, responding to all of these needs.

Its implementation provides companies in any sector with a means of optimising the overall process of managing business expenses, while contributing to the company’s profitability. Tickelia reduces the time spent on this process by 75% and can be 100% integrated with ERP, CRM, payroll and human resources management software . It also allows you to set customisable alerts for greater control of payments according to the policy of each organisation and has an intelligent fraud detection process.

Another of the functionalities that makes this solution so practical is that to digitise the receipts you only need to take a photo of them from the app and that’s it, Tickelia takes care of managing the entire business flow such as approval, control of spending policies, management of advances and accounting with the ERP .

In addition, Tickelia is the only expense management solution that takes full responsibility for the VAT recovery process , both national and international, through a fee for success and with the highest recovery rate in the market .

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3 FAM 3240 

REPRESENTATION ALLOWANCES

(CT:PER-1165;  11-30-2023) (Office of Origin:  GTM/ER/WLD)

3 FAM 3241  GENERAL INFORMATION

3 FAM 3241.1  Purpose of Representation Allowances

(CT:PER-924;   09-21-2018) (Uniform State/USAGM/Commerce/ Foreign Service Corp-USDA) (Applies to Foreign Service Employees Only)

a. The purpose of representation allowances is to enable the Department and the Foreign Service to provide for the proper representation of the United States, thus furthering foreign policy objectives.  This is the only reason for the availability of such funds and the only criterion for their use.

b. Representation funds do not accrue to any officer or employee solely by virtue of rank, title, or position.  Rather, they are available for expenses incurred on behalf of the U.S. Government.  They are not meant to take care of normal social obligations as members of the community.  Entitlement to the use of a specified amount of such funds is granted to individual officers or employees on an ad hoc basis.

3 FAM 3241.2  Authority

a. The legal and regulatory authority is Section 905 of the Foreign Service Act of 1980, as amended (22 U.S.C. 4085).

b. Related regulations:  Department of State Standardized Regulations (DSSR) 300.

c.  For USAID, see ADS 610, Use of Entertainment Account, Representation Allowances and Program and Operating Expense Funds for Entertainment.

3 FAM 3241.3  Guidelines for Representation Allowances

(CT:PER-924;   09-21-2018) (Uniform State/USAGM/Commerce/Foreign Service Corp-USDA) (Applies to Foreign Service and Civil Service Employees)

The guidelines for representation allowances are as follows:

(1)  Expenditures for tangible gifts normally do not fulfill the single purpose of the representation allowance which is to enable the Department and the Foreign Service to pay for the proper representation of the United States and its interests and to further U.S. interests abroad; and

(2)  Expenditures for tickets or admission to unhosted events normally are a poor use of representation funds, and while not prohibited, are considered allowable only in those instances where the highest levels of host-country officials are present and the attending employee has the necessity and opportunity to fulfill the purpose of the representation allowance.  For example, expenses for attending fund-raising dinners, concerts, balls, or other strictly social functions normally do not meet the criterion for the representation allowance and typically are prohibited.

3 FAM 3242  PHILOSOPHY

a. A great deal of work that could be called “representation” involves little or no expenditure of money.  Further, lavish expenditures are questionable in most circumstances.  The wealth of the United States as a nation must not be flaunted and requires a certain restraint, coupled with the standard of good taste, upon our official representation abroad.

b. Many of the more formal or ceremonial aspects associated with the conduct of foreign relations can be simplified without surrendering those elements of tradition worth preserving.  Representatives of the United States must try to reduce any emphasis given to purely ceremonial or formal observances.

3 FAM 3243  PROHIBITIONS

3 FAM 3243.1  Expenditures Prohibited by Law

Department of State Standardized Regulations (DSSR) 330 contains a list of expenditures that are prohibited by law.  Authorizing officers must be familiar with that list, and will consult it before approving expenditures for representational purposes.

3 FAM 3243.2  Who to Contact for Interpretation of Legal Prohibitions

In cases of doubt, authorizing officers must contact the Bureau of the Comptroller and Global Financial Services (CGFS) and the Office of the Assistant Legal Adviser for Management (L/LM) for further guidance.

3 FAM 3244  RESPONSIBILITY

3 FAM 3244.1  Chief of Mission

a. Each chief of mission has the responsibility to grant representation funds to officers and employees and must determine the mechanics of granting representation funds to fit conditions peculiar to the post.

b. Authority to approve such expenditures is delegated, within the limits of funds made available, to the chief of mission.  Each approval will involve a decision on the part of the chief of mission to use a specified amount of money, in a particular instance, in a certain manner, in order to accomplish a specific objective.

c.  Representation funds made available to a mission may be used at the discretion of the chief of mission for any expenditure not specifically prohibited by law or regulation.  However, the chief of mission must take into consideration and attempt to abide by not only the letter, but also the spirit, of the applicable laws and regulations.

3 FAM 3244.2  Delegation of Authority

a. At small diplomatic missions, it may, indeed, be possible for the chief of mission personally to approve individual expenditures.

b. At large posts, this may be impossible, and it may be necessary to delegate authority for preparing a representation program to a senior subordinate or a group of senior subordinates.

c.  In any event, the Department assumes that any voucher properly certified at the post for payment of representation expenses has met the implicit, if not explicit, approval of the chief of mission.

3 FAM 3244.3  Foreign Affairs Agencies Guidelines for Granting Representation Allowances

Department of State, USAGM, Commerce, and Agriculture will follow the principles outlined in this section in granting representation allowances allotted for use by employees of their agencies assigned to posts in foreign areas.  See chart below for further information.

3 FAM 3245  ALLOWABLE EXPENDITURES

Entertainment as an allowable expense includes hosted parties, dinners, lunches, breakfasts, sports, or cultural events.  It must be clearly demonstrated that the purpose is to directly promote U.S. foreign policy interests; that the expenditure is not for personal recreation; and that the expenditure is not prohibited by these regulations or DSSR 320 and 330.

3 FAM 3245.1  Related Representation Expenses that are Prohibited

a. Tangible gifts, including admissions to unhosted events, to any U.S. executive, legislative, or judicial branch employee are prohibited.

b. Funds cannot be spent solely for the benefit of U.S. Government executive branch organizations or entities (e.g., U.S. Marine guards, American schools, recreation associations, or other groups).  Expenditures that encompass or indirectly benefit any such group must further U.S. foreign policy interests and be an allowable expenditure not otherwise prohibited by these regulations or DSSR 320 and 330.

3 FAM 3246  PLANNING AND CONTROL AT POST

3 FAM 3246.1  Basic Guidelines

The basic guideline that the post must follow to provide effective use of representation funds entails:

(1)  A defined policy (i.e., a determination on the part of the chief of mission of the specific objectives to be pursued);

(2)  A planned program (i.e., the careful weighing of alternatives to arrive at a program best suited to accomplish the policy objectives as established in mission goals and work plans);

(3)  An allocation of funds (i.e., the assignment of responsibility for implementing the program to individual officers or employees); and

(4)  A continuing review of representation activities to ensure effective utilization of available funds.

3 FAM 3246.2  Post Usage of Representation Funds

The ability to make effective use of limited resources is an art that usually must be learned.  Thus, it is incumbent upon senior officers, including the chief of mission, to give guidance to those less experienced in the proper use of representation funds.  In general:

(1)  The U.S. presence, official and private, must be less than half the total guest list;

(2)  Smaller events are preferable to large ones;

(3)  New contacts must be developed, but funds may also be used to deepen existing ones for business purposes, not personal relationships;

(4)  Local custom must largely be respected in holding representation events in or out of the home;

(5)  Meetings:

(a)  Representation funds may be used to pay for attendance at professional meetings, including associated meal costs, which are considered reasonable and customary expenses of such meetings, when a determination is made by the chief of mission or designated representative that an association or professional meeting be attended for representational purposes (e.g., Departmental functions which are of primary benefit to the U.S. Government).  For additional information on associated meal cost and coverage, see 4 FAM 448.2 ; and

(b)  Funds may not be used to pay for meals at professional meetings (consular, commercial, or other associations) when the primary benefit is to the employee; and

(6)  Membership fees:

(a)  Representational funds may not be used to pay membership fees or dues in any society, club, or association under any conditions (see 4 FAM 448.2 for funding membership fees, meetings, or dues with Diplomatic and Consular Program (D&CP) funds.  The intent of this authorization is to defray employees’ costs of association with professional groups when the direct benefit to the U. S. Government is access to information and activities of those groups, and the forum those groups provide for the expression of U. S. interests by the employee or member as opposed to a primary benefit to the individual employee); and

(b)  U. S. Government payment or reimbursement of membership in social, sporting, or similar organizations is never appropriate.  This regulation, therefore, does not authorize membership in country clubs, golf clubs, swimming clubs, hiking clubs, biking clubs, yacht clubs, etc.

3 FAM 3246.3  Prescribed Limitations Relating to Representation Allowance

a. In the interest of discouraging ostentation, the chief of mission must establish dollar limits for the various types of approved representation activities.

b. Since representation relationships are established and maintained primarily with host-country officials and private citizens, guest lists for representation events must reflect minimum guest-ratio guidelines set by the chief of mission for each type of representation function (rarely more than 50 percent U. S. Government executive branch employees) to ensure that representative cross sections are invited.

3 FAM 3246.3-1  Limitations of Advance Purchases

(CT:PER-1165;   11-30-2023) (Uniform State/USAGM/Commerce/Foreign Service Corp-USDA) (Applies to Foreign Service and Civil Service Employees)

At the discretion of the chief of mission or their

 designee, purchases of representation supplies in advance of a function must be limited to the type and quantity necessary due to circumstances at post.  Each post must develop written guidelines to cover the specific situations where advance purchases are authorized.

3 FAM 3246.3-2  Types of Advance Purchases That Are Permitted

(TL:PER-487;   10-31-2003) (State Only) (Applies to Foreign Service and Civil Service Employees)

Representation-funds reimbursement or payment, except for invitation cards and American wine, is permitted only event-by-event on the basis of guest (recipient) lists.

3 FAM 3246.3-3  Purchases for Future Events

Bulk purchases to cover several future representation events, even though practical and economical, except for invitation cards and American wine, must be financed by the host or other officer and reimbursed only on an event-by-event basis.  However, if a preliminary guest list for a July 4 reception is prepared, for example in April, the financial management officer may start making payments for supplies for that event in April to the extent there is a bona fide need for such early procurement and if the requirements for the event are reasonably specific and foreseeable.

3 FAM 3246.3-4  Excess Supplies

If such supplies are not fully consumed because of reduced attendance or other circumstances, the post must maintain an accounting of excess supplies and document their use, usually for subsequent specific representation events.

3 FAM 3246.3-5  Procurement of Invitation Cards and American Wine

Reasonable amounts of invitation cards and American wine (not to exceed a year’s supply):  A prior year’s usage must be used as a benchmark and this amount may be procured and paid for or reimbursed as a bulk purchase in lieu of buying new cards or American wine for each representational event.

3 FAM 3246.3-6  Purchase and Shipment of American Wine

a. American wine, if purchased in bulk from official funds, must be under inventory control of the accountable property officer, and must be accounted for (as a nonreimbursement item) on representation vouchers.

b. In no case, however, is the post authorized to use excess year-end funds to purchase wine, invitations, or other representation supplies and materials that are not a bona fide need of that fiscal year.

c.  Employees assigned to post with a consumables allowance may use a part of their allowance for the personal purchase and shipment of American wines for both personal and representational use.

3 FAM 3247.1  Instructions for Representation Expenditures

(TL:PER-487;   10-31-2003) (State only) (Applies to Foreign Service and Civil Service Employees)

Instructions for vouchering, certifying, payment, and accounting for representation expenditures are found in 4 FAM 430 .

3 FAM 3247.2  Representation Appropriation Requests

(CT:PER-629;   11-09-2010) (State Only) (Applies to Foreign Service and Civil Service Employees)

State’s representation appropriation requests are stated in terms of four basic purposes of expenditures as follows:

(1)  Promotion of U.S. national interests;

(2)  Protection of U.S. citizens’ interests;

(3)  Promotion of economic activities; and

(4)  Commemorative and ceremonial requirements.

When approving representation activities, the chief of mission must indicate which of the above purposes most accurately describes the activity.  This purpose will be cited on the payment voucher.

3 FAM 3248  REQUEST FOR INCREASES

3 FAM 3248.1  Request for Additional Funds

If, in the opinion of the chief of mission, the lack of additional funds would seriously hamper the effectiveness of the mission, a request for additional funds may be made by cable.

3 FAM 3248.2  Information Needed to Request Additional Funds

The following information is needed to request additional funds:

(1)  A complete justification, including an indication of what effect the lack of such funds will have on the post’s substantive operations; and

(2)  An explanation why the funds already allotted could not be reprogrammed to meet the exigency.

3 FAM 3248.3  Where to Send Requests for Additional Representation Funds

Department of State personnel must send their requests for additional representation funds to the pertinent regional bureau executive director in the Department.

3 FAM 3249  REPRESENTATION ALLOWANCES FOR FAMILY MEMBERS AND FOREIGN SERVICE NATIONAL EMPLOYEES

a. Section 905 of the Foreign Service Act of 1980 (22 U.S.C. 4085) authorizes representational allowances for family members acting with or on behalf of employees whose official positions entail responsibility for establishing and maintaining relationships of value to the United States in foreign countries.

b. In addition, on an exceptional basis, Foreign Service national employees may be permitted such payments, where deemed appropriate, and with the approval of the head of agency or agency designee, and consistent with guidelines on representation established by the chief of mission.  Refer to DSSR 310.

Travel as a representation expense

Some of the most common   representation expenses   are costs related to travel. Customer visits, meetings, etc. often require the use of means of transport and this, of course, has associated costs. 

Travel costs are common on any self-respecting expense report. The use of a car (whether the employee’s own or a company vehicle) or other types of transport is a fundamental requirement on business trips. Travel expenses, therefore, consist of any cost generated that may be associated with a corporate trip. Parking fees, tolls, taxis, train tickets, etc.

Mileage expenses, however, often involves their own particular associated management, as they cover costs reimbursed by companies to an employee to compensate for any type of wear and tear or consumption that the vehicle has had.

Aspects encompassed within mileage expenses

Although the first thing to come to mind when talking about mileage allowances is the cost of fuel, this is just one of the aspects that make up this area of travel expenses.

• Fuel : accounts for 60% of mileage expenses. One of the quintessential aspects in relation to mileage.
• Wear and tear of the vehicle : occasional expenses resulting from the deterioration of the vehicle, as well as any possible breakdowns.
• Taxes :  the price allowed per mile also takes into account the costs of for the vehicle’s registration, road licence, etc.
• Insurance :  the car’s insurance is another expense covered by the mileage allowance . This concept must be taken into consideration due to the legal implications it may have for the company.

Mileage expenses are the costs reimbursed by companies to an employee to compensate for any type of wear and tear or consumption that the vehicle has had during a work-related trip.

All of these aspects add up to a single figure that is paid to the employee. In essence, it becomes a kind of price per mile that the employee is paid.

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You can save a lot of money if you do planning and documentation well – so we recommend you to read this article carefully!

Representation costs – what are they?

Representation costs are defined as costs that are directed at stakeholders outside your company, like customers. Representation costs can be incurred, for example, when you invite your client over lunch to negotiate the terms of a future contract. In general, these costs are the result of maintaining or developing your company’s business relationships. Representation costs can also arise when you are trying to create new business relationships. Business gifts are one very typical form of this kind of costs.

Representation costs can also arise from, for example, accommodation and travel expences when you are on a representation trip, as well as expences related to an apartment or property that is used in representation events. You may also have hired catering staff for the representation event, in which case their wages are counted as representation costs. Representation costs also include depreciations that are made from the acquisition costs of an asset that is intended for representation.

Please note that representation costs are only 50% tax deductible. At the same time, you should also remember that if the representation costs include value added tax, this tax is not deductible.

Negotiation costs vs. representation costs

The main difference between negotiation costs and representation costs is that, while representation costs always consist of costs caused by stakeholders outside the company, negotiation costs are usually caused by your company’s internal negotiations. You may, for example, negotiate with different authorities or meet your auditor, in which case you will incur negotiation costs. You can deduct these expenses 100% in your company’s taxes.

Please note that large amounts of alcohol or extravagant food are not accepted as meeting costs. However, the usual catering during negotiations is considered negotiation costs, which you can deduct in full for taxation. For example, if you organize a Christmas party for your company’s own employees and you can verify that the catering at the party was reasonable, you can deduct the costs caused by the catering in your taxes in full.

Although the basic principle is that negotiation costs are incurred within your own company, in some cases, negotiation costs may also be incurred when negotiating with your customers and offering them something small and usual.

If you are going to deduct this kind of costs in taxation, make sure that you have documents that describe the nature of the event, as well as with whom and why the event was organized. Accurate documentation is important, because without proper evidence, your company’s negotiation costs are easily interpreted as representation costs; in this case, you can’t deduct as big amount in taxes than you originally planned.

For a small entrepreneur, the difference can be significant, especially if there are many events to be organized.

For example, you offer a corporate lunch worth 100 euros to your important client. After the income benefit, your company’s net cost of lunch is around 90 euros. You can deduct 50% of this, i.e. half in income tax when the income tax is 20%. However, if the delegation lunch is interpreted as a negotiation cost, the net cost of the lunch for your company is only about 70 euros, from which you can deduct 100% in income tax, with income tax at 20% and VAT deduction at 14%. If such lunches are offered often, the difference is significant for a small entrepreneur’s economy.

Sometimes the difference between negotiation and representation costs is vague, but since some costs can only be deducted in taxes by 50% and others by 100%, it is in the entrepreneur’s interest to try to verify that the right to deduct is 100%. Therefore, take care of documenting the negotiation sessions you organize! Receipts and invoices, which contain mandatory markings such as the date of issue, the seller’s VAT number and the tax rate, are considered documents. A small entrepreneur should try to make the most of the deductions.

If you need more detailed instructions, we recommend reading more on the subject on the Tax authority’s website .

Negotiation costs:

• Internal company meetings
• Lunch with an auditor or consultant, for example
• Small servings
• Christmas party with the staff, if the service was reasonable
• 100% right of deduction in business income taxation

Representation expenses:

• For example, customer meetings or lunch with a customer
• Value added tax cannot be deducted from representation expenses
• 50% right to deduct business income tax

Representation expenses or negotiation costs? Don’t worry, we’ll help you!

If you need additional tips on these matters or a shoulder to get support from, don’t hesitate to contact us. You should always check these matters with your accountant, especially if you are unsure whether it is an agency fee or a negotiation fee.

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The Bureau of Internal Revenue (BIR) allows businesses to deduct certain expenses from their taxable income. As a rule of thumb, most of these allowed expenses should be relevant and necessary to business activities, while including others such as social security contributions and donations to charitable institutions.

When applying deductible expenses, you may choose between two options: itemized deductions and optional standard deductions (OSD). Between the two, the OSD is simpler to compute because your allowable deduction is set at 40% of your gross sales or receipts, but only itemized deductions will keep you from paying income tax if your expenses exceed your income. With itemized deductions, you’ll also have to present receipts as proof of your deductible expenses. We discuss this in detail in our article ‘Itemized Deduction vs. Optional Standard Deduction – Find Out What’s Right for You’. Meanwhile, we cover everything you need to know about deductible expenses in the following paragraphs.

What Expenses may be Deducted

Below is a list of the deductible expenses allowed by the BIR. However, to ensure that a certain business expense is indeed allowed, it is important that you consult with an accountant or a tax professional.

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Criteria for Allowable Deductions

While the list above shows what expenses may be deducted, you must ensure that these meet the following criteria set by the BIR:

The Expense Must be Business-Related. As we mentioned earlier, majority of deductible expenses allowed must be relevant and necessary to the business. These are typical disbursements that your business needs in order to operate. So if you are running a tarpaulin printing business, for example, a valid business expense may include your purchase of ink and the maintenance of your printer. That said, personal expenses are naturally excluded from allowable deductions.

It Must be Presented with Supporting Documents. This one applies to itemized deductions. In order for an expense to be deducted, you must show proof of the said expense such as a receipt or sales invoice. However if you opt for the OSD, you aren’t required to present any proof to substantiate the 40% deduction.

It Must not be Illegal, Immoral, and not Against Policy and Order. Any illegal activity is automatically excluded from deductible expenses.

The Amount Deducted Must be Reasonable. There’s a ceiling to certain expenses such as the Representation and Entertainment expense, which is capped at 0.5% of net sales for those who sell goods and 1% of revenues for service providers.

For OSD, the allowable deductible expense is automatically limited to 40% of your gross sales or receipts.

Withholding Taxes Must Have been Paid

How to Ensure Your Compliance to Rules on Deductible Expenses

Expenses that you can deduct from your gross income and the criteria of what is considered a deductible expense are fairly clear and straightforward. However, there may be some instances where exclusions would apply, creating a potential for confusion and issues with the BIR during tax season.

Because of that, it may be ideal to work with accountants and tax professionals who can help you navigate through the complexities of the tax system, so you can pay the right taxes and prevent compliance issues today and in the future. For more information, contact us today about your services at Beyond D Numbers, from tax compliance to payroll services.

Disclaimer: Information contained in this article may become outdated and is therefore meant as general guidance only. It is not intended as professional accounting or tax advice.

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• Itemized Deduction vs. Optional Standard Deduction – Find Out What’s Right for You
• What You Need to Know About Deductible Expenses

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REPRESENTATION EXPENSES Definition

REPRESENTATION EXPENSES are those expenditures whose character and primary purpose is for representational or entertainment related activities, including receptions or banquets.

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What Is an Expense?

Understanding expenses, how expenses are recorded, types of business expenses, special considerations.

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Expense: Definition, Types, and How Expenses Are Recorded

Daniel Liberto is a journalist with over 10 years of experience working with publications such as the Financial Times, The Independent, and Investors Chronicle.

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An expense is the cost of operations that a company incurs to generate revenue. It is simply defined as the cost one is required to spend on obtaining something. As the popular saying goes, “it costs money to make money.”

Common expenses include payments to suppliers, employee wages, factory leases, and equipment  depreciation . Businesses are allowed to write off tax-deductible expenses on their income tax returns to lower their  taxable income  and thus their tax liability. However, the Internal Revenue Service (IRS) has strict rules on which expenses businesses are allowed to claim as a deduction.

Key Takeaways

• An expense is the cost of operations that a company incurs to generate revenue.
• Businesses can write off tax-deductible expenses on their income tax returns, provided that they meet the IRS’ guidelines.
• Accountants record expenses through one of two accounting methods: cash basis or accrual basis.
• There are two main categories of business expenses in accounting: operating expenses and non-operating expenses.
• The IRS treats capital expenses differently than most other business expenses.

Investopedia / Jake Shi

One of the main goals of company management teams is to maximize profits. This is achieved by boosting revenues while keeping expenses in check. Slashing costs can help companies to make even more money from sales.

However, if expenses are cut too much it could also have a detrimental effect. For example, paying less on advertising reduces costs but also lowers the company’s visibility and ability to reach out to potential customers.

Companies break down their revenues and expenses in their income statements . Accountants record expenses through one of two accounting methods: cash basis or accrual basis. Under cash basis accounting, expenses are recorded when they are paid. In contrast, under the accrual method, expenses are recorded when they are incurred.

For example, if a business owner schedules a carpet cleaner to clean the carpets in the office, a company using the cash basis records the expense when it pays the invoice. Under the accrual method, the business accountant would record the carpet cleaning expense when the company receives the service. Expenses are generally recorded on an accrual basis, ensuring that they match up with the revenues reported in accounting periods.

Expenses are used to calculate net income. The equation to calculate  net income  is revenues minus expenses.

There are two main categories of business expenses in accounting: 

Operating Expenses

Operating expenses are the expenses related to the company’s main activities, such as the cost of goods sold, administrative fees, office supplies, direct labor, and rent. These are the expenses that are incurred from normal, day-to-day activities.

Operating expense is deducted from revenue to arrive at operating income; the amount of profit a company earns from its direct business activities. Companies need to manage their operating expenses to ensure that they are maximizing profits; this is usually done by keeping expenses at a minimum; however, reducing expenses too much can reduce the company's productivity.

Non-operating Expenses

Non-operating expenses are not directly related to the business's core operations. Common examples include interest charges and other costs associated with borrowing money. These are expenses that occur outside of a company's day-to-day activities. These costs may occur from restructuring, reorganizing, interest charges on debt, or on obsolete inventory.

Non-operating expenses are separate from operating expenses from an accounting perspective so as to be able to determine how much a company earns from its core activities.

Capital Expenses

Capital expenditures , commonly known as CapEx, are funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, an industrial plant, technology, or equipment.

The IRS treats capital expenses differently than most other business expenses. While most costs of doing business can be expensed or written off against business income the year they are incurred, capital expenses must be capitalized or written off slowly over time.

The IRS has a schedule that dictates the portion of a capital asset a business may write off each year until the entire expense is claimed. The number of years over which a business writes off a capital expense varies based on the type of asset.

Not All Expenses Can Be Deducted

According to the IRS, to be deductible , a business expense "must be both ordinary and necessary." Ordinary means the expense is common or accepted in that industry, while necessary means the expense is helpful in the pursuit of earning income. Business owners are not allowed to claim their personal, non-business expenses as business deductions. They also cannot claim lobbying expenses, penalties, and fines.

What Are Examples of Expenses?

Examples of expenses include rent, utilities, wages, salaries, maintenance, depreciation, insurance, and the cost of goods sold. Expenses are usually recurring payments needed to operate a business.

What Are the Types of Expenses?

Expenses can be categorized in a variety of ways. Expenses can be defined as fixed expenses, such as rent or mortgage; those that do not change with the change in production. Expenses can also be defined as variable expenses; those that change with the change in production. These include utilities and the cost of goods sold. Expenses can also be categorized as operating and non-operating expenses. The former are the expenses directly related to operating the company, and the latter is indirectly related.

Is Salary Considered an Expense?

Yes, salary is considered an expense and is reported as such on a company's income statement.

An expense is a cost that businesses incur in running their operations. Expenses include wages, salaries, maintenance, rent, and depreciation. Expenses are deducted from revenue to arrive at profits. Businesses are allowed to deduct certain expenses from taxes to help alleviate the tax burden and bulk up profits.

Internal Revenue Service. " Guide to Business Expense Resources ."

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Internal Revenue Service. " Tax Guide for Small Business ." Pages 30-39.

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list of allowable deductible expenses

Part of running your business are tracking your expenses. BIR allows certain expenses to be deducted to your income. Below are the allowable deductible expenses from BIR.

Advertising and Promotions

Amortizations

Charitable Contributions (Note: Donations should be made to BIR accredited donee institutions, otherwise individual taxpayers can only claim 10% of the donation as deductible)

Commissions

Communication, Light and Water

Depreciation

Director’s Fees

Fringe Benefits

Fuel and Oil Insurance

Interest (Note: The taxpayer’s allowable deduction for interest expense shall be reduced by an amount equal to the 33% of the interest income subjected to final tax. Moreover, all interest incurred or paid to related parties cannot be claimed as deductions to income)

Janitorial and Messengerial Services

Management and Consultancy Fee (Note: A portion of expenses must be withheld and paid to BIR.)

Miscellaneous

Office Supplies

Other Services

Professional Fees (Note: A portion of expenses must be withheld and paid to BIR.)

Rental (Note: A portion of expenses must be withheld and paid to BIR.)

Repairs and Maintenance-Labor

Repairs and Maintenance-Materials/Supplies

Representation and Entertainment (Note: Limited to 0.5% of net sales for sellers of goods or 1% of net revenue for seller/provider of services.)

Research and Development

Salaries and Allowances

Security Services

SSS, GSIS, Philhealth, HDMF and Other Contributions

Taxes and Licenses

Tolling Fees

Training and Seminars

Transportation and Travel

Others (Case to case)

All expenses that you should encode in Taxumo should be related to the business. If you can ultimately reason out why it's related to your business, then you can add that expense.

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How to Deduct Your Entertainment Expenses on Your Taxes

• August 8, 2023

Business owners understand the importance of building relationships with clients and business partners. This may often involve hosting business gatherings or social events – and they may be be tax-deductible.

While the IRS typically allows businesses to deduct 50% of qualified entertainment expenses , the amount that businesses can save through tax deductions varies widely. Determining factors in this regard, include the industry, size and nature of the business, as well as applicable tax laws. In this article, we will guide you through the process of deducting your entertainment expenses on your taxes.

3 Things to consider when deducting entertainment expenses

Deducting entertainment expenses is subject to specific rules and regulations, and navigating the complexities of tax laws can be challenging. It is our goal to help you make the most of the deductions while staying compliant. Consider the following when deducting business expenses.

1. Understand qualified entertainment expenses for your industry

To deduct entertainment expenses on your taxes, it is essential to know what qualifies as deductible expenses. Qualified entertainment expenses must be directly related to your business or have a clear business purpose. This can include business meals with clients, customers, or potential business partners, tickets to entertainment events that are used for business purposes, and expenses for business-related social gatherings and outings.

2. Know the bounds within which you can claim

Firstly, take note of the fact that the IRS typically allows for only 50% of qualified entertainment expenses to be deducted. To qualify for a deduction, the entertainment expense must also meet certain requirements as outlined by the IRS . Typically, the primary purpose of the gathering should be to conduct business or develop business relationships. While some entertainment may be enjoyable, the underlying business purpose must be well-documented and evident.

3. Keep detailed records to justify deductions

Maintaining accurate and detailed records is crucial when deducting entertainment expenses. It is important to keep track of the date, amount, and nature of each expense. Businesses should also keep record of the individuals involved and the business purpose of the event. Receipts, invoices, and other documentation are essential to substantiate your deductions in case of an audit. Consult with your CPA to aid your business ensure compliance in this regard.

Deducting entertainment expenses on your taxes can be a valuable way to reduce your tax liability and foster business relationships. But it is important to ensure regulatory compliance in this regard.

At Fusion CPA, we understand the intricacies of tax regulations and can help you navigate the complexities of deducting entertainment expenses while ensuring compliance. By seeking professional advice, you can maximize your deductions and focus on growing your business with confidence. Contact us to discuss the best way possible forward in this regard.

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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.

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What are the allowed deductible expenses in ITR?

Q: It is tax season once again and I am preparing to file for income tax this week. I understand that one way to lower income payments is by increasing expenses. I have prepared list of expenses but I am not sure if these are acceptable. What are the expense items that I should review before I submit to the BIR (Bureau of Internal Revenue)? – Veron, by email

A: With the deadline for income tax filing fast approaching, one of the tasks you should be doing now is to review your income tax returns. Determine how your income tax has been computed and see if your revenues and expenses have been properly recognized and declared. 

So how do you get started?

One way to check your income tax is to look closely at your expenses. For tax computation purposes, BIR does not allow every business expense that you incur to be deducted from your taxable income.

For example, you might have included business expenses in your income statement that the BIR may not recognize unless they are supported by official receipts. There are also some expenses that must be documented properly to establish a direct connection between them and your business. These expenses, if disallowed by the BIR, could translate into substantial taxes especially if they contribute a large portion of your operating expenses.

Personal expenses

There are some entrepreneurs who claim personal expenses as official expenses of the business. As a rule, personal or living expenses are not allowed by the BIR as business expenses.

This practice sometimes goes unnoticed by the tax agency. However, red flags are raised if the amount involved is large, especially when the amount is classified as representation expense. The BIR defines representation expenses as necessary expenses incurred in providing entertainment, amusement, or recreation to clients.

Among the personal expenses that are typically passed off as representation expenses are eating out, going to a country club, watching movies and concerts, and similar recreational activities. Under BIR rules, a service company can claim only up to 1% of the total net sales of the business as representation expense. On the other hand, a business engaged in selling goods and properties can claim only up to 0.5% of its total net sales as representation expense.

For example, if the total net sales of your food business is P1 million ($21,701.38), the maximum representation expense that you can claim would be only P5,000 ($108.41).

Compensation expenses

The next item you should review is your compensation expenses. Even if you already withhold taxes on your employees’ salaries and incur other payroll-related deductions, you also need to look at other compensation expenses.

For instance, do you provide your managers with car plans or housing as incentives? Do you provide your manager expense accounts? Do you give special financial assistance to some of your employees? If so, then you need to pay additional taxes, one of which is the fringe benefit tax.

The fringe benefit tax is computed by dividing the monthly expense amount by 68%, and then multiplying the quotient by 32%; the result of this 2-step process is the fringe benefit tax.

For example, if you provide your manager a housing allowance of P15,000 ($325.24) a month, you will need to pay a fringe benefit tax of P7,058 ($153.04) on top of the expense.

Withholding taxes

Other items that you need to check are expenses that require you to withhold a certain amount from the payee: an amount that you yourself must remit to the tax agency.

In essence, you are advancing to the BIR the income taxes of those receiving the payments from you. These include rental expenses, professional fees, and commission expenses. The tax rates differ according to the type of expense.

For example, if you pay a rental fee of P25,000 ($542.07) a month, you are required to withhold 5% of the amount in behalf of the BIR so you pay your landlord only P23,750 ($514.97).

If you pay a commission to your contractor, you need to withhold 10% of the payment. Failing to withhold taxes due these payments could lead to penalties for your business.

Taxable income

To minimize your taxable income, look for ways to increase your expenses legally. One way to do this is by depreciating newly acquired assets used in the business. To maximize your depreciation expenses, select the most appropriate depreciation methods and accurately estimate the useful life of the property.

If you borrowed money from a financing institution to acquire an asset, you have the option to classify the interest costs on that loan as an expense so you can lower your taxable income.

You can also check your accounts receivable, or money owed to you by a customer for products or services provided on credit you might find in them some bad accounts that need to be written off.

Once you have determined that the account is no longer collectible, you can charge it under expenses. These are some of the things that you need to consider when reviewing your expenses for your tax payments. Being aware of tax regulations and their implications will help structure your business properly and minimize taxes legally.

HENRY ONG, CMC ®

Henry Ong is an entrepreneur, investor, researcher and business columnist for more than 20 years. He holds double degree in accountancy and applied economics, a Registered Financial Planner (RFP) and Certified Management Consultant (CMC). Follow him on twitter @henryong888

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Representation Matters, But at What Expense?

Underrepresented minorities should not allow the lack of representation to win out over individuality..

“Representation matters.” This catch phrase has become relevant in various areas of industry from film to finance, academic fields, positions of power, and more. It is a response that defines a rebellion against the default: white, male, and rich. Often times, when young children dream big, those who actually end up fulfilling their dreams have the advantage of seeing examples of people that look like them. Knowing there is a lack of representation, at times, colors the consciousness of the few privileged underrepresented minorities that end up on a path toward a bright future. It is a weighty thing to make decisions not only for yourself, but with those whom you represent in mind. Growing up as a black girl with an affinity for science and math, the encouragement of my parents and teachers drove me to continue pursuing the subjects. The people cheering you on can only get you to a certain point, though. When the toughest semesters for STEM concentrators inevitably come amid lab, section, and lectures loaded with information, you begin to understand why they are called “weed out” classes. The difference between then and now forced me to reevaluate what it means to be good at and to enjoy what I do. For many of us, high school was a breeze. We may have had to work hard and put in time studying, but the grades and relative successes came much easier. We may have had a sense of what we did or did not like, but our inclinations were not really put to the test until we reached an institution of higher learning. With the pressure now to maintain a certain GPA and build a resume that launches us to the next step after college, struggling to do well and, at times, failing anyway makes you rethink everything. For those who come from underrepresented backgrounds in certain fields, the existential question becomes who am I doing this for — myself or my people? And is it worth it? What many of us who are not white, male, and rich discovered when we first displayed some adeptness for these fields is that there were not many people who could relate to our identity. In light of the numerous negative consequences that arise when diversity is missing, this births a sense of duty in us to be the trailblazer that future generations can identify as a familiar face. In actuality, this self-ascribed or even family and community-driven obligation is an unrealistic pressure to place on ourselves as young people “figuring it out.” What you were good at and maybe even what you liked as a nine year old may not hold ten years later, and that is perfectly okay because people change, possibly even more so in the first 20 to 30 years of life. This does not mean that at the sight of any challenge or resistance, we should take it as a sign. Just because high school was a breeze does not mean college and beyond will have the same level of ease, but I do believe there is a grace given to anyone following their God-ordained purpose. Even in the midst of struggle, it is bearable because deep down you know this is what you are really meant to do and there is something that you love about it that keeps you going. If this resonates with you, by all means, continue to represent, but don’t allow the lack of representation to be yet another source of bondage, keeping you chained to unhappiness. Please do not misconstrue my message: Representation does matter but not at the expense of individuality. It is not the purpose of every underrepresented minority to flock to fill the ranks of every subject area where we are woefully lacking. Rather, we should all try to figure out what we were placed here on Earth to do and encourage those few pioneers in fields lacking representation to keep paving the way for others who are genuinely meant to be there to follow.

Ifeoluwa T. Obayan ’19, a former Crimson Editorial Comp Director, is a Biomedical Engineering and Social Anthropology joint concentrator in Leverett House. Her column appears on alternate Thursdays.

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