I briefly touched on this previously, but I thought this was so clever that it needed its own post.
For the most part, handling taxes is simple, especially in a full bookkeeping app like QuickBooks. You simply enter the total expense, choose the tax rate, and the software does the rest for you.
Meals, on the other hand, are an entirely different beast. You can only claim 50% of the expense as a tax deduction. As such, you can also only claim 50% of the GST, but you paid for 100% of the bill with your business’ money, right? You still have to account for that money.
There are different ways of handling this. When I was younger, I was taught to just leave it, and let the accountant make the proper adjustments at year end. I’m sure part of that was make things easier on the bookkeeper, and part to give the accountant more billable hours. Either way, there’s no reason not to do it properly. The other way is to just manually calculate 50% of the GST each time, and make a separate line on the entry to account for this. There’s nothing wrong with doing it that way, it’s just time consuming. If you or your client take a lot of lunch meetings, this will waste a lot of your time.
The folks over at Intuit posted up a great tutorial on how to set this up in QuickBooks. Let’s go through the videos they have posted up to step you through the process.
1. Create a Tax Vendor
httpv://www.youtube.com/watch?v=Wg-MzyCZ4jY
One note with this video. When you’re creating the tax expense, be sure to make it a sub-account of your Meals & Entertainment expense. This is what it looks like on my system.
2. Create 2 Sales Tax Items
httpv://www.youtube.com/watch?v=q5vaSQ8x5Tk
3. Create a Sales Tax Group
httpv://www.youtube.com/watch?v=7H4XDvJY4mU&feature=related
4. Create a Sales Tax Code
httpv://www.youtube.com/watch?v=1rtqq8b4YlM&feature=related
5. Assign the Sales Tax Code to your Meals & Entertainment Expense Account
Now that this new code is complete, it’s time to assign it to your expense account.
- Go to your Chart of Accounts (List –> Chart of Accounts or Ctrl+A)
- Find your Meals & Entertainment expense
- Edit it by either right-clicking and choosing Edit Account or highlight it and press Ctrl+E
- The image above shows the edit screen. From Sales Tax Code, select the tax code you created. In my case, I called is MST.
- Click Save & Close, and you’re done.
Now, whenever you enter a bill or a cheque for Meals, QuickBooks will automatically select your new tax code, and split up the allocation properly.
I know this takes a bit of time, but knowing that your calculations are correct at the end of the year makes it all worth it.
Do you have a good tip to make bookkeeping easier? Please share it in the comments.
Hello
i great GST on meal ( non-taxable) and made it a sub account of meal and entertainment and when i record an expenses no thing posted to this sub account?!!
the GST/HST split correctly but the full amount ( before Sales tax) is posted to meal and entertainment no thing to the sub account?
any help why?
Hi Hassan.
Wow, you’ve stumped me with that one. I tried to replicate it in my system, but to no avail.
If you set this up as per the instructions, here’s what you should see. There should be the pre-tax amount in the line item with the special tax code selected. Then, at the bottom right, where it normally just shows GST, it should show 2 tax lines, one for the taxable GST, and another for the non-taxable GST. If you’re not seeing both lines, then the problem is in the setup of the new tax code.
Now, the M&E expense should show the non-taxable part too, since everything in sub-accounts will show up in the parent account. So, on a $10.50 meal (in AB), you should see $10.25 in M&E, and $0.25 in GST payable.
Let me know if/when you get this working, or if there’s anything else I can do to try to help you with this.
Hi,
After entering your first expense , should there be any amount in the Receiver General-Non taxable (vendor screen)? Mine is empty but I do noticed it’s listed in the Manage Sales tax screen as a neagtive.
I set everything up following your instructions and QB, with the exception of 50% (6.5) HST since I am in Ontario.
I am just trying to understand this as this is the first time I am doing this, so because we created an HST on meals expense account (non-taxable) – this amount (50% of the HST paid on meals) will be an expense for the company oppose to ITC. Is this correct?
Any advice will be helpful.
Thanks
Hi Rosita,
No, there shouldn’t be an amount in their vendor screen.
Yes, you are correct. Since you spent the money, you have to account for it all. However, since only 50% of the tax is deductible, you have to claim the rest of the money you spent as an expense.
I hope that answered your questions.
Eric.
Hi Eric,
I appreciate your suggestion above. I am wondering though how I should be accounting for the tip and LXT (liquor tax). When I input the debit amount into the 'write cheque' function and then select the Meals & Entertainment expense account with the newly created M&E tax code as per above it calculates the GST split but it is not correct as per the receipt as it is not accounting for the tip or the liquor tax. Can you advise how I need to input the entry so that it will calculate the GST correctly with these two items in mind?
Thanks,
Laura
Hi Laura.
Sorry for the terribly slow response time.
You've stumped me on the liquor tax part. I'll have to look into that further, and see if I can find out some solutions. As for the tip, I usually just post 2 line items in those cases. I'll post the tip first with 0% tax, and then use the M&E tax code for the rest of the bill.
I'll let you know if/when I come up with a quick solution for the other part of your question.
Thanks for commenting. I always like a good challenge.
Eric.