Tax Accounting — Business Entertainment Expenses and Donations: Calculating the Limits and Tax Adjustments

Business entertainment expenses and donations have a weak link to the business or are open to abuse, so they are deductible only within limits. From 2024 the Corporate Tax Act renamed “entertainment expenses” (jeopdaebi) as business entertainment (business promotion) expenses. Amounts above the limit for both are disposed of as other outflow, and excess donations can be carried forward to later business years. The general principles of deductible expenses were covered in chapter 3.

1. Business entertainment expenses

A. The qualifying-evidence requirement

Business entertainment expenses of more than ₩30,000 per occasion (₩200,000 for congratulatory and condolence gifts) require qualifying evidence such as a credit card slip, cash receipt or tax invoice. Without it, they are disallowed first, before the limit is calculated (other outflow). If there is no evidence at all and the recipient is unknown, they are disposed of as a bonus to the representative.

B. Calculating the limit

Deductible limit on business entertainment expenses

\text{Limit} = \underbrace{\text{₩12 million (SMEs ₩36 million)} \times \frac{\text{Months in the business year}}{12}}_{\text{Basic limit}} + \underbrace{\text{General revenue} \times \text{Rate} + \text{Related-party revenue} \times \text{Rate} \times 10\%}_{\text{Revenue-based limit}}

The revenue rates are 0.3% up to ₩10 billion, 0.2% on the part above ₩10 billion up to ₩50 billion, and 0.03% on the part above ₩50 billion. Additional limits apply to cultural spending and spending at traditional markets.

TH (an ordinary corporation with a 12-month business year) has revenue of ₩20 billion (all general revenue) and business entertainment expenses of ₩75 million in its income statement, of which ₩3 million is spending over ₩30,000 per occasion without evidence.

TH's tax adjustments for business entertainment expenses (unit: ₩10,000)
Step	Calculation	Amount
① Disallowance for missing evidence		300
② Amount subject to the limit	7,500 − 300	7,200
③ Basic limit	1,200 × 12/12	1,200
④ Revenue-based limit	₩10 billion × 0.3% + ₩10 billion × 0.2%	5,000
⑤ Total limit	③ + ④	6,200
⑥ Disallowance above the limit	7,200 − 6,200	1,000

Total disallowances are ₩13 million, all other outflow. For an SME in the same position, the basic limit is ₩36 million, so spending falls within the ₩86 million limit and only the ₩3 million without evidence is disallowed.

2. Donations

A. Classes of donation

Classes of donation and their limits
Class	Examples	Deductible limit
Special donations	State and local governments, national defence contributions, disaster relief, facilities of private schools and hospitals, etc.	(Base income − loss carryforwards) × 50%
Donations to employee stock ownership associations	Paid by the corporation to its ESOP association	(Base income − loss carryforwards − deductible special donations) × 30%
General donations	Social welfare corporations, religious bodies, non-profit corporations' proper-purpose activities, etc.	(Base income − loss carryforwards − deductible special and ESOP donations) × 10%
Non-designated donations	Alumni associations, hometown associations, groups other than political parties, etc.	Fully disallowed

Base income is income before donations — the adjusted income plus special and general donations paid. The loss carryforwards deducted are limited, for ordinary corporations, to 80% of base income.

B. Worked example

TI’s adjusted income is ₩800 million. Its income statement includes ₩100 million of special donations and ₩150 million of general donations as expenses, and it has no loss carryforwards.

Base income: $8 + 1 + 1.5 = 10.5$ (₩100 million), i.e. ₩1.05 billion
Special donation limit: $10.5 \times 50\% = 5.25$ (₩525 million) → the ₩100 million is fully deductible
General donation limit: $(10.5 - 1) \times 10\% = 0.95$ (₩95 million) → the ₩55 million excess is disallowed (other outflow)
Income for the business year: $8 + 0.55 = 8.55$ (₩855 million)

Special and general donations above the limit can be carried forward for ten years and are deducted first when later business years have spare limit. Donations are deductible when actually paid, so unpaid donations are disallowed (retained) and deducted in the year of payment.

Check your understanding

TJ (an SME with a 12-month business year) has revenue of ₩5 billion (general revenue) and business entertainment expenses of ₩50 million (all with qualifying evidence). Its adjusted income is ₩300 million, general donations paid are ₩40 million (expensed), there are no special donations and no loss carryforwards. How much of the business entertainment expenses and the general donations is disallowed?

The business entertainment limit is ₩36 million + ₩5 billion × 0.3% = ₩36 million + ₩15 million = ₩51 million, so the ₩50 million spent is within the limit and needs no adjustment. Base income is ₩300 million + ₩40 million = ₩340 million, so the general donation limit is ₩34 million. The ₩6 million excess is disallowed (other outflow) and carried forward for ten years.

References

Corporate Tax Act, Article 24 (disallowance of donations) and Article 25 (disallowance of business entertainment expenses) — Korea Law Information Center
Enforcement Decree of the Corporate Tax Act, Articles 41 and 42
National Tax Service, Corporate tax rates