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Showing appreciation with gifts or holiday parties for employees and customers is often part of the holiday season. Take note, some of these expenses might be tax deductible. Also, look into whether the gift is taxable to the recipient.
Gifts to customers
Gifts to customers are deductible up to $25 per customer per year. This limit does not include “incidental” costs that do not substantially add to the value of the gift. Incidental costs include engraving, gift-wrapping, packaging, and shipping. Branded marketing collateral is also excluded from the $25 limit; this includes items costing less than $4 and widely distributed such as pens or stress balls with your company’s name and logo printed on them.
The $25 limit does not include gifts to a company as long as they are reasonable. This might include items like gift baskets to be shared.
Gifts to employees
Usually, anything of value that an employer transfers to an employee is deductible for the employer and is included in the employee’s taxable income, and therefore subject to payroll and income taxes. However, noncash gifts that constitute “de minimis fringe benefits” are an exception. These items are not included in an employee’s taxable income and are still deductible by the employer. There is no specific dollar threshold for de minimis benefits, but most businesses use a cutoff of around $75.
De minimis fringe benefits are items so small in value and give so infrequently that accounting for them would be administratively impracticable to account for. These items include low-cost merchandise like holiday turkeys or hams, gift baskets, and occasional event tickets (such as individual sports games or theatre).
Cash gifts (as well as cash equivalents like gift cards), no matter how small or infrequent, are always included in an employee’s income and subject to payroll tax withholding.
Under the Tax Cuts and Jobs Act, certain deductions for business-related meals have been reduced, and deduction for business entertainment has been eliminated. However, certain recreational activities such as holiday parties are an exception.
Holiday parties and fully deductible and excludable from the recipients’ income. This exception requires the parties are attended for the benefit of non-highly-compensated employees and their families. If customers also attend, holiday parties may be partially deductible.
If you are considering throwing a holiday party or giving holiday gifts to customers or employees, contact us. Tax planning for these expenses will ensure you, and your recipients benefit as much as possible. Call us at 818-334-8623 or click here, and we will contact you.