Posted by Karen Munoz, EA

When Holiday Gifts Can be Deductible or Taxable

When Holiday Gifts Can be Deductible or Taxable

If you're like most business owners who want to close the year and prepare taxes this month, there are several holiday expenses that you can deduct that can save you thousands of dollars. As a sole proprietor, you know the importance of maintaining and strengthening your customer relationship. One proven way to improve business relationships is through corporate gifts.

By sending seasonal gifts to your customers, you can help ensure these relationships continue to thrive in the coming years while also opening up an opportunity for tax write-offs. What makes the best time of year all the more wonderful for your business? The fact that certain types of gifts can benefit your tax account.

As with tax deductions, there is a limit to the amount you can deduct when spending money on corporate gifts during the holidays. The only downside is that the IRS allows a maximum deduction of $ 25 for each person you send a gift to. This means that all gifts you have given to your client throughout the year, including holidays, birthdays, and other occasions, cannot exceed $ 25 for a single person. If you send a $ 10 bottle of wine to congratulate a client on the new home, you still have $15 for their holiday gift. If approved, this portion is not deductible. Additionally, if you give your client's son or daughter a gift, it is also considered a gift for your client that can be written off.

The good news is that there is no limit to the number of people you can give a $ 25 gift.

Here is a brief summary of the rules.

Gifts to Customers

When you give customers gifts, the gifts are deductible up to $ 25 per recipient per year. For the $ 25 limit, you must not include any "incidental" charges that do not significantly increase the gift's value, such as engraving, wrapping, or shipping. Branded marketing materials, such as pens or stress balls with your company name and logo, are also excluded from the $ 25 limit, as long as they are extensively distributed and cost less than $4.

The $25 limit is applicable to gifts for individuals. There are no fixed gift limits on gifts to a company, as long as they are "reasonable." 

Gifts to employees

Typically, any value you transfer to an employee is included in the employee's taxable income and is deductible for you. But there is an exception for non-cash gifts, which are "de minimis fringe benefits."

These are such low-value items and occur so infrequently that it would be administratively impractical to account for them. Common examples include gift baskets, Christmas turkeys or ham, occasional sports or theater tickets (but not for the season), and other inexpensive products.

De minimis benefits are not included in the employee's taxable income but can still be deducted. Unlike customer gifts, there is no specific dollar limit for de minimis gifts. However, many companies use an informal limit of $75.

Please note that cash gifts and cash equivalents, such as gift cards, are included in an employee's income and are subject to withholding tax, no matter how small.

Holiday Parties

The TCJA reduced some deductions for business meals and eliminated business entertainment deductions. However, there is an exemption for some recreational activities, including holiday parties.

Holiday parties are fully deductible (and excludes the beneficiary's income), provided that it is primarily for the benefit of low-paid employees and their families. If clients also participate, holidays may be partially deductible.

Make a charitable donation.

Gifting to the less privileged is one of the purposes of this festive period, and it serves as a good deduction for your business. The general rule is that deductions for charitable donations apply to personal and non-business tax returns. Be sure to distinguish between advertising and charitable giving.

For example, purchasing an ad for your business as part of the local school holiday production program may support the school, but it does not count as a charitable donation.

Meal expenses and gifts

Another way to show customers how much you appreciate them is to invite them over for food and drinks. You can deduct the cost of chain meals. The IRS will allow you to claim 50% of these business expenses. Remember to keep detailed notes and receipts about the clients you deal with at these meetings.

In general, gifts from employers to employees are considered bonuses subject to FITW, FICA, and FUTA. However, nominal value gifts, such as small Christmas presents, are treated as additional minimum tax benefits.

A gift is considered de minimis if:

  • Accounting for items would be administratively impractical;

  • The gift is offered to promote the health, goodwill, satisfaction, or efficiency of employees.

  • The gift is rarely given; and

  • The value is nominal;



Karen Munoz, EA
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