With Thanksgiving just around the corner, the holiday season will soon be here. This time of year, your business may want to show its gratitude to employees and customers. Giving them gifts or hosting holiday parties after a year of forgoing them due to the pandemic can show them this gratitude. It’s a good time to brush up on the tax rules associated with these expenses. Are they tax deductible by your business and is the value taxable to the recipients?
Gifts to Customers
If you give gifts to customers and clients, they’re 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. These costs include engraving, gift wrapping, packaging, and shipping. Branded marketing items that are widely distributed and cost less than $4 are also excluded from the $25 limit. These branded marketing items are items such as those imprinted with your company’s name and logo.
There’s no set limit on gifts to a company as long as the costs are “reasonable.” The $25 limit is for gifts to individuals. For example, this would include a gift basket for all team members of a customer to share.
Gifts to Employees
In general, anything of value that you transfer to an employee is included in his or her taxable income (and, therefore, subject to income and payroll taxes) and deductible by your business. But there’s an exception for noncash gifts that constitute a “de minimis” fringe benefit.
These are items that are small in value and given infrequently that is administratively impracticable to account for. Common examples include holiday turkeys, hams, gift baskets, occasional sports or theater tickets (but not season tickets), and other low-cost merchandise.
De minimis fringe benefits aren’t included in an employee’s taxable income. But, 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.
Cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income. This is subject to payroll tax withholding regardless of how small and infrequent.
Throw a Holiday Party
In general, holiday parties are fully deductible (and excludible from recipients’ income). And for calendar years 2021 and 2022, a COVID-19 relief law provides a temporary 100% deduction for expenses of food or beverages “provided by” a restaurant to your workplace. Previously, these expenses were only 50% deductible. Entertainment expenses are still not deductible.
The use of the words “provided by” a restaurant clarifies that the tax break for 2021 and 2022 isn’t limited to meals eaten on a restaurant’s premises. Takeout and delivery of meals from a restaurant are also generally 100% deductible. So you can treat your on-premises staff to some holiday meals this year and get a full deduction.
Show your Holiday Spirit
Contact us if you have questions about the tax implications of giving holiday gifts or throwing a holiday party.