The holiday season is a great time for businesses. A time to show their appreciation for employees and customers by giving them gifts or hosting holiday parties. However, before you begin shopping or sending out invitations, it’s a good idea to find out whether the expenses for the gifts are tax deductible. In addition, you will also want to know if the gift/s taxable to the recipient. Here’s a brief review of the rules for the holiday party and gifts tax deductible 2018.
When you make gifts to customers, the gifts are deductible up to $25 per recipient per year. For purposes of the $25 limit, you need not include “incidental” costs that don’t substantially add to the gift’s value. A few examples includes 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. A couple examples of marketing collateral include pens or stress balls 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 (a gift basket for all to share, for example) as long as they’re “reasonable.”
Generally anything of value that you transfer to an employee is included in the employee’s taxable income. Therefore, it is subject to income and payroll taxes and deductible by you. But there’s an exception for non-cash gifts that constitute “de minimis fringe benefits.”
These are items so small in value and given so infrequently that it would be administratively impracticable to account for them. Common examples include holiday turkeys or hams, gift baskets, occasional sports or theater tickets (but not season tickets), and other low-cost merchandise.
An employee’s taxable income does not include de minimis fringe benefits, yet it’s still deductible by you. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.
Keep in mind that an employee’s income includes cash gifts — along with cash equivalents, such as gift cards. In addition, it is subject to payroll tax withholding regardless of how small and infrequent.
The Tax Cuts and Jobs Act updated accounting rules for meals and entertainment expenses. This includes reducing certain deductions for business-related meals and eliminating the deduction for business entertainment altogether. There’s an exception, however, for certain recreational activities, including holiday parties.
Are holiday parties tax deductible? Yes, holiday parties are fully deductible, and excludible from recipients’ income. This is assuming that they’re primarily for the benefit of non-highly-compensated employees and their families. If customers also attend, holiday parties may be partially deductible.
If you’re thinking about giving holiday gifts to employees or customers or throwing a holiday party, contact us. With a little tax planning, you may receive a gift of your own from Uncle Sam.