Embrace the spirit of giving and deducting

It’s the time of year when your business might choose to show its appreciation to employees and customers in the form of gifts or a holiday party.

But even generosity has tax implications — and many of them can be beneficial for a business owner.

Employee gifts and taxes

In general, anything of value that you transfer to an employee is part of his or her taxable income. It’s also 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 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.

De minimis fringe benefits aren’t included in your employees’ taxable income, but they are deductible by your business. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts.

Cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and subject to payroll tax withholding regardless of how small they are and infrequently they’re given.

Customer gifts and taxes

If you provide 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 (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 each.

The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (for example, a gift basket for a customer’s entire staff to share) if the cost is “reasonable.”

Holiday parties and taxes

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 parties.

Holiday parties are fully deductible (and excludible from recipients’ income) if they’re primarily for the benefit of employees who aren’t highly compensated. If customers or clients attend, a holiday party may be partially deductible.

Holiday cards and taxes

Sending holiday cards is a long tradition that shows customers and clients your appreciation. If you use the cards to promote your business, you can probably deduct the cost.

© 2023 KraftCPAs PLLC

KraftCPAs can help.

Reach out to an advisor at 615-242-7351, or send the information below to have an advisor contact you.

  • Should be Empty:
  • Topic Name:

Search Site

Search Team

Search Articles