UPDATED OCT 2019
The following guide will help you set up a Meals & Entertainment tax code so that the ineligible amount automatically posts to its own expense account. This frees you from doing those periodic calculations and journal entries. I’m in a GST-only province, so I’m going to set this up with the 5% GST in mind. You can easily modify this to work in different provinces by following the same guidelines.
Here’s how to set this up. We’re going to add two new tax rates, then one new tax group.
STEP ONE: ADD TAX RATE
- Open the Sales Tax centre from the left navigation bar
- Choose ‘Manage sales tax’ in the upper right-hand corner
- Select ‘Add rate’
- Fill out as shown.
- Click ‘Add’
STEP TWO: ADD TAX RATE
- Select ‘Add rate’
- Fill out as shown. Note you want to choose Expense – this is how you’re mapping the ineligible portion.
- Click ‘Add’
NOTE: Here’s a look at the audit log to see what happened behind the scenes. QBO automatically added a new account called GST/HST Expense. You can change the name if desired (i.e. Non-Deductible GST Expense), as well as the category account type (i.e. Other Expenses), from the Chart of Accounts. You can also assign an account number if you’ve turned them on in settings.
If you do NOT want the unrecoverable portion of the tax in its own expense account, use the Account ‘Non-tracking‘ as shown here. It will post back to the same expense account used on the transaction.
STEP THREE: ADD GROUP RATE
- You should be back in Manage sales tax
- Select ‘Add tax’ in the upper right-hand corner
- Click ‘Add’ next to Group rate
- Fill out as shown. You’re creating a group that includes the two tax rates you created in steps one and two. NOTE: BE CAREFUL ADDING THE GROUP RATE, IT CANNOT BE EDITED.
- Click Add
REVIEW YOUR WORK
- You should see the two tax rates along with the group that you just added.
- SMART TIP: Inactivate the two tax rates you just added by selecting ‘Make inactive’ so that only the group rate appears as a choice on transactions.
TEST THE CODE
Here’s an example credit card expense. $7.50 posts to the GST/HST Expense account and the other $7.50 post to the GST/HST Payable liability account.
I always do a dry run in the test drive file. Here’s the link: https://qbo.intuit.com/redir/testdrive_ca
Apply same principals for setting up in different provinces.
Use names and descriptions for the tax rates and group rate that make sense to you. Just remember that the group rate cannot be edited in any way OR inactivated at this time.
Meals themselves must be adjusted at end of period. I always let the accountant know that the ITCs have already been adjusted so they don’t make an unnecessary entry.
If you are implementing this solution mid-year, you will need to do one of two things:
- Adjust the ITCs on meals to back out the 50% up to the point you start using the new method.
- Go back to the start of the fiscal year and edit all the meal entries to code them with the new ME tax code. NOTE: If you are an accountant, you CANNOT currently do this using the Reclassify Transactions feature. For some reason the custom sales tax codes does not show up in the reclassify feature.
2 thoughts on “HOW TO SET UP TAX RATES FOR MEALS & ENTERTAINMENT IN QBO”
Could we use this for charities who can claim 50% of ITCs as well?
Absolutely! Refer to this post: https://thinkquickbooks.com/2019/04/02/how-to-set-up-the-gst-hst-public-service-bodies-psb-rebate-in-qbo-2/