HOW TO SET UP TAX RATES FOR MEALS & ENTERTAINMENT IN QBO
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 adjusting the percentages.
Here’s how to set this up. We’re going to add two new tax rates, then a new tax group.
STEP ONE: ADD TAX RATE
- Click on Taxes from the left navigation bar
- Click on Add tax in the upper right-hand corner
- Choose Tax rate
- Fill out as shown.
- Click Save
STEP TWO: ADD TAX RATE
- Click on Add tax in the upper right-hand corner
- Choose Tax rate
- Fill out as shown. Note the Account filled in as Expense – this is how you’re mapping the ineligible portion.
- Click Save
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, just remember to click on the pencil icon to add the number.
STEP THREE: ADD GROUP RATE
- Click on Add tax in the upper right-hand corner
- Choose 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 Save
REVIEW YOUR WORK
- Click the Edit GST/HST drop down; select Edit rates. Here you’ll see the two tax rates along with the group that you just added.
- TIP: You can inactivate the two tax rates you just added so that only the group rate appears for selection on transactions.
TEST THE CODE
Here’s an example credit card expense. $2.50 posts to the GST/HST Expense account and the other $2.50 post to the GST/HST Payable liability account.
NOTES:
I always test these out first 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.
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.