The holiday season is now officially in full swing. Many businesses show their gratitude to employees and customers by providing gifts or hosting holiday open houses and parties. It’s a good idea to understand the tax rules associated with these expenses.
What’s the tax treatment to the business and tax treatment to the recipients (employee vs customer/vendors)?
If you make gifts to customers and clients, the gifts are deductible up to $25 per recipient per year. (Note: the $25 gift limit has been in place, without increase, for more than 40 years). For purposes of the $25 limit, you don’t need to include “incidental” costs that don’t substantially add to the gift’s value, such as engraving, gift wrapping, packaging or shipping. Also excluded from the $25 limit is branded marketing collateral — such as small items imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4.
The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (for example, a gift basket for all team members of a customer to share) as long as they’re “reasonable”. Common examples you see of this are cheese and cracker platters, fruit baskets, and assorted chocolates. As a public accounting firm, during our busiest time of year, our vendors will send food and treats to our employees as a nice gesture. For our vendors, this is a tax deduction that is not subject to the $25 limit since it is a promotional/marketing gift to our company.
Unless the employee gift qualifies as a “de minimis” fringe benefit, the value of the gift is included in the employee’s compensation (and, therefore, subject to income and payroll taxes); it’s also deductible by your business.
What’s a “de minimis” fringe benefit?
These are items small in value and given infrequently that are administratively impracticable to account for. Common examples: holiday turkeys or hams, gift baskets, occasional sports/theater tickets (but not season tickets), and other low-cost merchandise.
De minimis fringe benefits aren’t included in your employee’s taxable income yet they’re still deductible by your business. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.
SPECIAL NOTE: Cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and are subject to payroll tax withholding regardless of how small and infrequent.
Throwing a 100% deductible employee holiday party
The Tax Cuts and Jobs Act changed the tax deduction for certain business-related meals (generally still 50% deductible) and the deduction for business entertainment (no longer deductible). However, there’s an exception for certain recreational activities, including holiday parties.
Holiday parties are fully deductible (and excludable from recipients’ income) so long as they’re primarily for the benefit of non-highly-compensated employees and their families. If customers and others also attend, holiday parties may be partially deductible. The costs that are fully deductible include food and entertainment. This means you can fully deduct the costs to provide your employees and their spouses/guests with a meal (your choice: buffet style or sit down) and live music.
Depending on the volume of these types of transactions and the structure of your accounting department, it is advisable to have specific accounts in your general ledger to identify & track these expenses (i.e., 50% deductible, 100% deductible and 100% non-deductible).
Spread good cheer
Please contact your Wegner CPAs tax expert if you have questions about deducting qualifying holiday gifts/parties or how to report your year-end staff/vendor gifting activities.