During the holiday season, it is natural for business owners to think about giving something to key individuals. On your list might be your employees, customers, suppliers, or others who helped your business during the year. If you have not already made plans, do so quickly so the gifts may be distributed before year-end.
Lavish gifts may make an excellent impression, but you probably do not want to go overboard by spending too much. You should have a budget for these gifts and stick to it. You also should know the tax consequences of your generosity.
Employee gifts
Amounts you spend on gifts to your workers probably will be tax deductible for your company. However, the key question for employees is whether the gifts will be treated as taxable income.
Generally, a cash gift or anything that looks like cash, such as a gift card or gift certificate, will be taxable. The amount will be subject to federal and any state or local income tax withholding as well as unemployment tax and FICA taxes.
Non-cash gifts will be untaxed if they fall under the de minimis classification, meaning that the value is so low that it would not be reasonable for an employer to bother with record keeping, withholding, and so forth. The IRS has not spelled out an upper limit for spending on tax-exempt gifts. That said, you are probably safe giving away hams or turkeys during the holidays.
If you wish to give other types of gifts, our office can advise you of the tax consequences. Just remember that more expensive gifts probably will generate taxable income to the recipient. In all price ranges, choices are vast and variable, from smartphone accessories to tickets to local entertainment.
Your gift will be even more meaningful if it is accompanied by a thoughtful letter of thanks and wishes for good health in the coming year.
Business gifts
Instead of or in addition to employee gifts, you may want to give something to selected outsiders who helped your company. In this case, the issue is not whether the gift will be taxable income for the recipient, but whether you can deduct the cost of gifts to clients, vendors, and so on.
A business may deduct no more than $25 for business gifts per recipient. You cannot exceed this limit by making indirect gifts to a customer’s family member. Therefore, if you give a $200 sweater to the husband of a key customer, it will be considered an indirect gift over the $25 limit, and the excess amount will not be tax deductible. However, this rule does not apply if you have a bona fide, independent business connection with the family member receiving the gift, and it is not intended for the customer’s eventual use.
For this purpose, a partnership and its partners are treated as one taxpayer. Similarly, a married couple will be treated as one taxpayer subject to the $25 limit. It does not matter whether the spouses each have their own company, are employed at different places, or have independent connections with the recipient.
Example: Steve Harrison’s company does business with ABC Corp., which is a valued customer. Steve and his wife Tina give four baskets of wine to ABC as a holiday gift. The Harrisons paid $100 apiece for these baskets, for a $400 total. Four ABC executives each took a gift basket home for their personal use. The Harrisons have no independent business relationship with any of the executives’ other family members. They can deduct only $100 (4 times the $25 limit) of the cost of the gift baskets.
Incidental costs, such as engraving on jewelry, packaging, insuring, and mailing, are generally not included in determining the cost of a gift for purposes of the $25 limit. That is true, as long as the incidental cost does not add substantial value to the gift.
Beyond $25
The following items are not considered gifts for purposes of the $25 limit:
- An item that costs $4 or less that has your name clearly and permanently imprinted on the gift and is one of many identical items your company widely distributes. Such items might include pens, desk sets, plastic bags, and cases.
- Signs, display racks, or other promotional material to be used on the business premises of the recipient.
Keeping good records can enable you to support deductions for business gifts if those deductions are challenged.