Even though we are doing business in Japan, the impact of the new coronavirus was significant. Even if it will subside in the future, the demand for masks increased very much for a period of time. How will the cost of these masks be treated for income and corporate tax purposes? We will explain whether the cost of masks can be accounted for as a necessary expense for sole proprietors or as a deductible expense for corporations.
It is a good example of how to be aware of the relevance of your business even after the new coronavirus has settled down. Let's think about this together.
Introduction: Questions Regarding Sole Proprietorship and Corporate Tax Treatment
Questions have arisen regarding the tax treatment of expenditures for masks and PCR tests in the fight against the new coronavirus between sole proprietors and companies. For sole proprietorships, the cost of masks and PCR tests paid by the proprietor is allowed as a necessary expense as long as the relevance to the business is properly verified.
On the other hand, if a company provides masks to its employees, they can be included in the company's deductible expenses. However, since consumable expenses are often accounted for for entrance purposes, care should be taken to avoid the possibility of changing the use of the supplies in the process. We will discuss this in more detail below.
Expenses necessary for the provision of masks made to support
Is the cost of providing masks for an individual to use in his/her business a necessary expense of a sole proprietorship?
If an individual provides masks purchased for use in his or her own business, the cost is allowable as a necessary expense for the sole proprietor. This is provided that the expenses are necessary for the sole proprietor to carry out his/her business. The distinction between this and home use may be ambiguous, but be sure to be able to explain it properly. For example, you may need to renew your masks frequently because you work in the field, or the expense is essential to prevent the spread of infectious diseases at a client's site.
By properly accounting for it, rather than somehow, it is allowable for tax purposes as a necessary expense. If it can be used for other things, such as masks, the IRS may look at it differently (from the public's point of view) depending on the purpose and scope of the donation.
Although it is most likely to be accounted for at the time of purchase, there are some issues to treat unused portions as stored goods. If there is a need to control the quantity, etc., do so.
Is the cost of providing masks made by a company to its own company deductible for the company?
The cost of providing masks made by a company to its own employees can be included in the company's deductible expenses. The company also has a responsibility under the Occupational Health and Safety Law. The expense is allowable as a deductible expense because it is necessary to improve the work environment.
However, since this is a work environment, be careful not to make it so that only someone in particular would benefit from it. If it is a specific someone, it could be considered a salary or executive salary.
Is the cost of a mask that I gave to a business partner for free because I don't have a mask a necessary expense or a deductible expense?
Expenses for other companies can be included in the amount of deductible expenses as a donation.
Although the situation has settled down now, if there is no mask and the donation is provided free of charge to the client, it will be treated as a donation in principle. However, if the nature of the donation is significant in the conduct of business and the amount is small, it may be treated as a loss. For example, a subcontractor forgot to bring masks, so we provided a few masks on the spot.
It depends on the situation, and I would like to talk with an expert in this area.
Method of journalizing
The candidates for the journal entry method are "supplies expense" and "welfare expense". There is no mistake either way. However, once you have decided, you should continue to use the same subject afterwards.
| Date | debit | method of lending | summary | ||
| March 6 | office supplies | 6,600 yen | cash | 6,600 yen | ABC Pharmacy Mask cost |
| Date | debit | method of lending | summary | ||
| March 6 | welfare expense | 6,600 yen | checking account | 6,600 yen | ABC Pharmacy Mask cost |
Handling of PCR testing fees by private employers and companies
PCR testing has become essential in the fight against novel coronaviruses, and if the cost of PCR testing is borne by a sole proprietor or company, it can be included in necessary expenses or deductible expenses if the business need for the test is properly recognized.
In this case, it would be a benefit expense rather than a consumable expense.
| Date | debit | method of lending | summary | ||
| March 6 | welfare expense | 16,500 yen | cash | 16,500 yen | DEF check service PCR test fee |
However, it must be fair to the employees. If the employee is anxious to take the job without anything, it cannot be a necessary expense for the sole proprietor, nor can it be a deductible expense for the company. A good example of necessity is the reason that it is necessary for a (foreign) business trip.
Taxation of disinfection costs related to telework
The transition to telework may require the cost of disinfection at home in addition to the cost of corona control in the office. In such cases, disinfection costs are to be borne by the individual, making it difficult to distinguish between work and private life, and one may be concerned about whether or not they are recognized as expenses. Disinfection supplies are generally treated as consumable goods and are often recognized as necessary expenses along with labor costs. However, home disinfection costs are often borne by the individual and are not recognized as expenses as they are. Note that if a company compensates its employees for home disinfection costs, it may be subject to taxation. Conversely, if an employee purchases disinfection costs at his or her own expense, a full income tax deduction is available through the tax return. While the transition to telework will inevitably increase disinfection costs, proper handling of these costs may save taxpayers money by adding them to necessary expenses.
How to journalize accounts for the cost of standing order medicines
To review the masks, those that were properly recognized as necessary to complete the project were included in the necessary expenses or deductible expenses. This is the same concept as for regular medicine.
Regarding how to journalize accounts for the cost of regular medicine and masks, in many cases, the cost is recorded as a consumable or benefit expense. Whether or not to separate them from consumables depends on whether or not you want to keep track of that line item. For companies, it is more sensible to separate them into employee benefit expenses. For a sole proprietorship, it depends on the quantity. If you only purchase a small amount of supplies once a year or so, it would be easier to combine them with other expenses as consumable expenses.
| Date | debit | method of lending | summary | ||
| March 6 | office supplies | 6,600 yen | cash | 6,600 yen | ABC Pharmacy Mask cost |
| Date | debit | method of lending | summary | ||
| March 6 | welfare expense | 6,600 yen | checking account | 6,600 yen | ABC Pharmacy Standing Drugs |
Deductibility of medical expenses for PCR testing costs paid by individuals
In the previous section, we discussed the treatment of PCR testing costs incurred by individuals and companies. In this section, we will discuss the eligibility of PCR testing expenses incurred by individuals for the medical expense deduction. As a general rule, testing costs incurred by an individual for travel purposes or simply for peace of mind are not deductible as medical expenses. As an exception, if the PCR test is performed at the discretion of a doctor or other medical personnel, the expense is deductible as a medical expense under the Income Tax Law.
This concept is similar to that of a medical examination. Medical examinations are basically not deductible medical expenses. The same is true for physical examinations. However, if a major illness is discovered as a result of the medical examination and treatment of the illness follows the diagnosis, etc., it is allowable. This means that medical examinations and physical examinations can be considered as medical examinations prior to treatment. In such a case, the expenses for the medical checkup, etc. are also deductible as medical expenses.
Separate image of consumable expenses
What falls within the scope of consumable expenses varies somewhat from sole proprietor to sole proprietor and company to company. As a general rule, the
- Short-term use of less than 1 year
- Fixtures and fittings with a purchase price of less than 100,000 yen
To give an example, stationery, batteries, paper, and other items have a form. Stationary medicines also have a form. The idea of making the cost a benefit expense is also valid, because the medicine improves the work environment. Unlike consumables, miscellaneous expenses are not the use of goods, but rather other expenses. If used too frequently, miscellaneous expenses will grow, and some may question whether everything is included in miscellaneous expenses.
In Summary.
In 2020, attention was focused on the necessary expenses and deductible expenses related to measures against the new coronavirus. Many companies purchased masks and disinfectant solutions to prevent infection, as well as teleworking environments for employees and specialized equipment. Such costs may be recognized as necessary expenses or deductible expenses if certain requirements are met.
As a journal entry concept, it is important to keep in mind that it can be applied to future general activities.