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Tax Blog

Tis the Season of Gifting: New IRS rules for rewarding your customers and employees

Whether you gift to employees for their hard work or to your customers as a thank you for their business, holiday gifting is a traditional way to spread cheer and recognize the people who are important to your business. Only certain types of gifts are deductible, so make sure you follow the rules to avoid a Grinch-like spoiler come tax filing season.

Employee Gifts: The IRS does NOT recognize the traditional ham, turkey, or other item of nominal value given at Christmas or other holidays as taxable income, but rather as a de minimis fringe benefit. However, if an employer gives cash or a cash equivalent, the gift is taxable regardless of the amount and must be included in wages. Cash equivalents include gift certificates, gift cards, store cards, prepaid cards, debit cards, or any other similar card or device, including those provided electronically.

Customer Gifts: Deductible business gifts are limited to $25 per recipient per year. There isn’t a limit on the number of people you can gift nor the amount you can spend, just the amount you can 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. Also, married couples and partners of a partnership are each considered one recipient.

And what about the holiday party? The holiday party is fully deductible if it is thrown for the benefit of employees and their families only. If clients or customers attend the holiday soirée, entertainment rules apply and only 50% of the cost associated with these party-goers is deductible. Just 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 cheer this year? Give us a call to discuss the proper treatment of such expenses.

The holidays got you stressed?

Padgett of West Virginia is committed to helping you navigate the financial and compliance waters of running a small business, contact us today for more information on how we can help you plan for your dreams.