The holidays are quickly approaching, with Thanksgiving just around the corner. Your company may want to spread some holiday cheer to your customers or employees. So, we thought a quick reminder on the tax rules related to holiday gifts and parties.
Employee Holiday Gifts
As a general rule, anything of value that a business transfers to an employee is taxable income, subject to payroll taxes and deductible by your company. However, there is an exception for noncash gifts that qualify as a “de minimis” fringe benefit.
Common examples are low-cost merchandise items, gift baskets, food items, sports or theatre tickets and clothing. These are items of small value that are given infrequently and are administratively impractical to account for.
These de minimis fringe benefits are not included in the employee’s taxable income and are still deductible by your company. Unlike customer gifts, there is no dollar limit for de minimis gifts.
Cash gifts, as well as cash equivalents such as gift cards, would be included in the employee’s taxable income and subject to payroll taxes, no matter how small or infrequent they are.
Customer and Client Holiday Gifts
Gifts to clients and customers are tax deductible up to a maximum of $25 per recipient per year. Incidental costs that do not significantly increase the value of the gift are not included in the $25 limit. This would include shipping, engraving, gift wrapping and packaging. Branded promotional items, such as those imprinted with your company’s name and logo, are also exempt from the $25 limit, as long as they are widely distributed and cost less than $4.
The $25 limit is for gifts to individuals. There is no set limit on gifts to a company (for example, a gift basket to a customer that their entire team would enjoy).
Throwing a Holiday Party
In general, holiday parties for employees are fully deductible. In addition, the value of the holiday party is not taxable income to the employee. The business must not discriminate (all employees should be invited). The holiday party should not be lavish or excessive.
The holidays are a great time to show your employees and customers that you appreciate them. Let’s ensure that appreciation is tax deductible! Contact your ClarkSilva advisor to discuss your holiday plans.