Entertainment expenses are a common topic of inquiry from clients, relatives, and acquaintances, each seeking clarity on their tax treatment. This article aims to address two frequently asked questions and delve into the intricacies of the tax treatment of entertainment expenditures. 

Question 1: Is Ang Pow an Entertainment Expense 

One common question is whether "ang pow" is consider an entertainment expense and eligible for tax deduction. It includes a customary cash gift given on occasions like weddings. The definition of entertainment as outlined in the Income Tax Act plays a crucial role in determining tax deductibility. Entertainment is defined as the provision of food, drink, recreation, hospitality, accommodation, or travel related to entertainment activities in connection with a trade or business. Since ang pow isn't aligned with this definition, it is therefore not allowable for tax deduction as it is a cash contribution. 

Question 2: Deductibility of Business Lunches 

Another common query pertains to the deductibility of expenses incurred while entertaining potential customers. For instance, covering an expensive lunch for potential customer is considered entertainment but it is not tax deductible under subsection 33(1) of the Income Tax Act, as they're not wholly and exclusively incurred in generating gross income. While entertainment expenses for existing customers are eligible for a 50% deduction, expenses for potential customers are not. 

DEFINITION OF ENTERTAINMENT 

Entertainment is defined in the Income Tax Act as (a) the provision of food, drink, recreation or hospitality of any kind and (b) the provision of accommodation or travel in connection with or for the purpose of facilitating entertainment of the kind mentioned in (a); by a person or an employee in connection with a trade or business carried out by that person. 

3 SIMPLE STEPS TO DETERMINE THE DEDUCTIBILITY OF ENTERTAINMENT

From the questions above, you notice that there are 3 steps in determining whether an entertainment expense can be allowed as a deduction:

Step 1: Determine if the Expense Qualifies as Entertainment

Does the expense fall within the definition of entertainment? If not, no deduction will be allowed.

Step 2: Assess Wholly and Exclusive Purpose

If the expense falls within the definition determined in step (1), the taxpayer must also determine whether the expense is wholly and exclusively incurred in the production of gross income. No deduction will be allowed if otherwise.  

Step 3: Differentiating Deductibility

There are instances where entertainment expenses can be either 100% or 50% deductible, depending on specific categories:

100% Deductible Entertainment Expenses: 

1. Provision of entertainment such as food, drink and recreation to employees.
2. A taxpayer whose business consist of providing entertainment to paying customers such as restaurant or cinema.
3. Promotional gifts at trade fairs, trade exhibitions or industrial exhibitions held outside Malaysia for the purpose of promoting exports.
4. Promotional samples of tax payers' products
5. Provision of entertainment for cultural or sporting events which are open to the members of public for the purpose of promoting the business.
6. Promotional gifts within Malaysia consisting of articles incorporating a conspicuous advertisement or logo of the business. The promotional gifts need not be the product of the business as long as the business logo is affixed on those articles. The promotional gift should be given to the public on a non-discriminatory basis.
7. Provision of entertainment which is related wholly to sales arising from that business.
8. Provision of benefit to an employee consisting of leave passage 

Entertainment expenses which qualify under Step 1 and 2 but which do not fall under any of the above categories of expenses are only allowed 50% deduction. Examples of such expenses include:

1. Gifts without a business logo for customer events.
2. Gifting flowers for customer’s opening new outlet.
3. Entertainment expenses for existing customers or suppliers.
4. Hampers for customers during festive seasons.