The calendar year is winding down and the holiday season will soon be upon us. Last year the pandemic caused many holiday parties to be canceled, so this year your business may want to bring back gift giving or holiday parties to show appreciation to your employees and customers.
Now would be a good time to review the deductibility of these business expenses and also consider the tax treatment of these gifts to the recipients.
Individuals – Gifts to customers are deductible up to $25 per individual per year. Costs that do not add to the value of the gift, such as engraving, gift wrapping, and shipping do not need to be included in the $25 limit. In addition, branded marketing items, with your company’s name and logo (with the stipulation that they are widely distributed and cost less than $4), do not need to be included in the $25 limit.
Businesses – When giving gifts to companies, as long as the cost is “reasonable”, there is no limit. An example of this would include giving a gift basket (e.g., fruit/nuts/cheese/crackers) for the employees to enjoy.
Generally, gifts given to employees will have the value added to his or her taxable income and will be subject to income and payroll taxes. Cash gifts and cash equivalents, such as an Amazon gift card, fall under this category. This value will be fully deductible by the business.
To avoid employees having to include the gift in his or her taxable income, many businesses take advantage of “de minimis” fringe benefits. These fringe benefit gifts are not included in an employee’s taxable income but are still deductible by the business.
De minimis fringe benefits are non-cash gifts that are small in value and are not given often. There is no specific dollar limit on these gifts, but many businesses use $75 as a rule of thumb. Examples of these types of gifts are holiday turkeys, gift baskets, and occasional sports tickets. If a benefit is too large to be considered de minimis, the entire value of the benefit will be taxable to the employee, not just the excess over a designated de minimis amount. The IRS has ruled previously in a particular case that items with a value exceeding $100 could not be considered de minimis, even under unusual circumstances.
Who doesn’t love a party? Even if it is just take-out enjoyed by staff at their workplace. In most cases, holiday parties are fully deductible by the business and excludible from the recipients’ income. More good news: for 2021 and 2022, the COVID-19 tax relief provisions allow a temporary 100% deduction for expenses of food or beverages provided by a restaurant (whether onsite or at the office/shop).
The pandemic has been hard on all of us. Therefore, if you are able, why not show your gratitude to your customers and employees. As a bonus, you will also get a tax deduction in the process. Contact us, if you have any questions about the tax implications of gift giving or holiday parties.