It’s the most wonderful time of the year! The holidays are upon us again. This festive and benevolent time of year can either make you feel like loosening those purse strings or clutching them tighter than Scrooge in A Christmas Carol.
We get it. Deciding whether or not to give gifts, what to get, and how much to spend can put the “Bah humbug” into the holiday spirit.
Consider the following, though:
Gift-giving makes your employees or clients feel appreciated. It strengthens office relationships, opens doors of opportunities, and increases chances for networking. Special gifts build employee morale, which boosts productivity and revenue.
Need another reason to tip the scales in favor of giving gifts to your employees or clients this year? How about this? Many gifts are tax-deductible to you.
So, go ahead and infuse your office or client list with holiday cheer that elevates employee goodwill and your tax deductions. Before you splurge on a company party or end-of-year bonuses, know the following:
How Gift-Giving Affects Your Taxes
Holiday gift-giving can affect you and your business at tax time and knowing how can help you decide on the best gift. Do you swing for a big office party as a gift? Hand out gift cards?
Knowing the tax rules connected to employee gifts can help you decide what’s right for you. Additionally, understanding what kinds of goodies end up on an employee’s W-2 form can help you pick a gift that won’t cost your employees at tax time.
Here’s the overview of gift-giving and taxes for businesses.
Cash and Gift Cards
All cash gifts and cash-equivalent gifts, like gift cards and movie tickets, are tax deductible for you up to $25 per employee per year. For the employee, gifts like these are taxable income on their W-2 forms, no matter the amount received. Your business gets the tax deduction for it, but employees get taxed.
Fringe Benefits
Examples of fringe benefits include:
- Food items (Think holiday ham or turkey.)
- Flowers
- Gift baskets
- Entertainment and sporting event tickets
- Ornaments
- Company merchandise
The value of these goods affects how the IRS assesses taxes. At or below $100 per person is categorized as “De Minimis” spending, meaning “of trivial or little importance.” The IRS considers the amount so insignificant that they don’t bother to tax it. Neither you nor your employees are taxed on these types of gifts as long as they are given infrequently and in small amounts. As a bonus, you can deduct these expenses from your taxes.
Prizes
Items given away or raffled off at the company Christmas party or around the office during regular business hours follow the same cash and cash-equivalent rules above. These are given randomly and not tied to work performance or achievements.
Parties
Neither you nor your employees report holiday parties as income. Parties are not taxed. Also, they are almost always 100% tax deductible for employers.
All employees must be invited to the party without exclusions for the party to qualify for a tax deduction. Asking vendors or clients to attend could reduce your tax deduction. Parties must not be extremely lavish and should include food and beverages.
Ensure your holiday party meets the requirements to be completely tax deductible by contacting your business CPA or tax advisor in the Charlotte area.
Bonuses
As long as a bonus is based entirely on your generosity and not tied to merit, then the same rules as a cash or cash-equivalent gift apply. However, it isn’t a gift if achievements or performances factor in. At that point, it becomes a taxable wage, and you must include it on the employee’s W-2 form as taxable income.
Cards
Holiday cards are a great way to spread cheer while spending very little. They are inclusive to the employee and their entire family.
Cards are stationary. Stationary and postage are business expenses and are tax deductible.
Charitable Donations
Support a good cause and gain a tax deduction with a gift to a charitable organization. The charity must be a tax-exempt organization to qualify.
Gift-Giving to Customers and Clients
Giving to loyal customers and high-value clients is beneficial in the same ways as gifting to employees. To be tax-deductible, cash, cash equivalents, and gifts must not exceed $25 per customer per year. The costs of imprinting your business logo, packaging, and mailing do not get added to the $25 limit and are not tax deductible.
Maximize Your Gift-Giving
It’s the time of year to give with a benevolent and thankful heart. However, prudent business owners must know their spending limits and the effects gifts have on them and their employees.
Maximize your gifting potential by contacting your local Charlotte CPA. A knowledgeable CPA firm can help you better plan and strategize all parts of your business, including gift-giving during the holidays.
