The holiday season is here. During this festive season, your business may want to show its gratitude to employees and customers by giving them gifts or hosting holiday parties. It’s a good time to review the tax rules associated with gift and company party tax deductions. Are they tax deductible by your business and is the value taxable to the recipients?
Many businesses want to show their employees appreciation during the holiday time. In general, employee’s taxable income includes anything of value that you transfer them (and, therefore, subject to income and payroll taxes) and is deductible by your business.
But there’s an exception for noncash gifts that constitute a “de minimis” fringe benefit. These are items small in value and given so infrequently that they are administratively impracticable to account for. Common examples include holiday turkeys or hams, gift baskets, occasional sports or theater tickets (but not season tickets), and other low-cost merchandise.
Your employees’ taxable income does not include de minimis fringe benefits 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.
Key point: Cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income. Therefore, they are subject to payroll tax withholding regardless of how small they are and infrequently they’re given.
If you make gifts to customers or clients, they’re only deductible up to $25 per recipient, per year. For purposes of the $25 limit, you don’t need to include “incidental” costs that don’t substantially add to the gift’s value. Some examples include engraving, gift wrapping, packaging or shipping. Also excluded from the $25 limit is branded marketing collateral provided they’re widely distributed and cost less than $4 each. A couple of examples of this include small items imprinted with your company’s name and logo.
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 of a customer’s team members to share) as long as the cost is “reasonable.”
Under the Tax Cuts and Jobs Act, certain deductions for business-related meals were reduced and the deduction for business entertainment was eliminated. However, there’s an exception for certain recreational activities, including holiday company party tax deductions.
Holiday parties are fully deductible (and excludible from recipients’ income). This is so long as they’re primarily for the benefit of employees who don’t receive high compensation and their families. If customers, and others also attend, a holiday party may be partially deductible.
Sending holiday cards is a nice way to show customers and clients your appreciation. If you use the cards to promote your business, you can probably deduct the cost. Incorporate your company name and logo, and you might even want to include a discount coupon for your products or services.
If you have questions about giving holiday gifts to employees or customers or throwing a holiday party, contact our Chicago payroll services team. We can explain the tax implications.