Question

In: Accounting

(2) Miscellaneous expenses           Expense accounts for overseas sales persons           Christmas gifts to office staff...

(2) Miscellaneous expenses

          Expense accounts for overseas sales persons

          Christmas gifts to office staff by owners

Kindly indicate those that are allowable expenses and those that are disallowable expenses if any.

Solutions

Expert Solution

You can claim tax deduction for expenses that are wholly and exclusively incurred in the production of income.
The following conditions must be met before any deductions are made:

  • The expenses must be revenue in nature, (This means that the expenses are incurred in the normal day-to-day operations of the company). Capital expenditure is not allowed as a tax deduction   Example: if you buy a new goods vehicle or a commercial property for own use)
  • The deduction must not be prohibited under the Income Tax Act Example: you may incur petrol costs in the day to day operations while driving your brand new Porsche, but the Act prohibits the deduction of all expenses related to S-Plate vehicles).
  • The expenses must be incurred. Contingent liability is not allowable as a tax deduction. Contingent liability refers to a liability that may be laden onto the debts of the company but the occurrence has not crystalized as of today.

Since time immemorial, it is generally considered that anything one gives or receives for free or without consideration gives happiness and deepens the relationship between persons. Now, why does this happen? Is it because we (the receiver of the gift) are not paying anything or that it raises the relationship to the next level by giving in consideration like trust, love and affection which is not valid consideration in law to cease the transfer as gift.

Gifts, in whatever form, whether cash or kind, is are a transfer of movable or immovable property from donor (Giver) to donee (Receiver) without any consideration in return. Without any consideration/No consideration is the ‘sine qua non’ of the term gift. So when this hallmark is replaced with even inadequate consideration, the transfer ceases to be gift. The expenses on gift can be incurred by one family member for another or by a distant relative or by a business for its clients.

Speaking from the perspective of a businessman, there are many reasons for buying gifts for the customers and business associates like maintaining good work relations, opening doors for opportunities, professional networking, and a thank-you for a job well done. There’s also one more incentive to make those gift purchases. All or part of the cost of your business gifts can actually become tax deductions.

Businesses generally offer gifts to their clients to set up long-lasting and durable relationship with them, and these serve as an expense to expand and earn income for the business which in turn lead to deduction of these expenses from the income so as to pay less tax. The important principle to understand here is that the expenses that are incurred should be in the nature of business promotion and not in the nature of capital expenditure and personal expenses of the assesse.

ekkarill92 answered 1 year ago
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