Who doesn’t love opening a present this time of year? Spreading that holiday cheer through a gift to your employees and customers is a great way to get in a festive spirit and thank them for their hard work, especially during a challenging year.
Remember that only certain types of gifts are deductible, so make sure you follow the rules to avoid a Grinch-like spoiler come tax filing season. Here’s a quick overview of some holiday gift options for your employees and customers:
Employee Gifts: The IRS doesn’t recognize the traditional ham, turkey, or other item of nominal value given at the holidays as taxable income, but rather as a de minimis fringe benefit (one in which the value and number of times it’s given is so small, accounting for it isn’t practical). But if an employer gives cash or a cash equivalent -- like gift certificates, gift cards, prepaid cards and the like -- the gift is taxable regardless of the amount and must be included in the employee’s wages.
Customer Gifts: Deductible business gifts are limited to $25 per recipient per year. Remember there isn’t a limit on the number of people you can share a gift with, nor the amount you can spend, just the amount you’re able to deduct. The $25 limitation doesn’t include incidentals like gift wrapping since it doesn’t add value to the gift and therefore wouldn’t be deductible. And don’t forget that married couples and partners of a partnership are each considered one recipient.
Holiday Parties: Office holiday parties are more likely to happen this year! Remember, though, that the food at a holiday party is fully deductible only if the party is thrown for the benefit of employees and their families. If clients, independent contractors, or customers attend the holiday soirée, then entertainment rules apply and only 50% of the food and beverage costs associated with these partygoers is deductible (and this applies even if the party was done virtually). An exception to the 50% rule applies for 2021 and 2022 if the food and beverages were purchased from a restaurant. Also, don't get too lavish. The IRS always keeps an eye on business deductions and the costs associated with an extravagant event.
Thinking of spreading holiday goodwill this year? Reach out to our trusted network of accountants, tax experts and business advisors at PADGETT BUSINESS SERVICES® so we can make sure your employees and customers can benefit from a gift and you don’t get stuck with a lump of coal in return. Contact your Padgett office today and let us help you reach your business goals.
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