The holiday season is synonymous with giving gifts. Your business may be giving gifts at this time to various people…employees, customers, vendors, and prospects to name a few. Giving to charity is one thing (and not discussed in this blog); giving to individuals is another. What should you give? How does this affect your taxes? Should you create a gifting policy for your staff?
What should businesses give?
Employees usually want money…year-end bonuses. As depicted in the movie Christmas Vacation, they don’t want a jelly-of-the-month subscription. Of course, cash can be supplemented with gifts not only at holiday time, but year-round.
For clients, customers, vendors, and other business associates, deciding on the right gift can be challenging. According to Giftpack, a company that helps businesses find the right gifts, 69% clients prefer personalized gifts over branded items, and 74% prefer to receive virtual offering and e-gifts. Does this give you ideas?
Tax rules for deducting the cost of gifts
Who you give gifts to determines the tax treatment for your action.
- Gifts to employees. The cost of gifts to employees is treated as additional compensation, which is deductible by the employer. More specifically, gifts are supplemental wages. This additional compensation is subject to payroll taxes. Supplemental wages can be combined with regular wages for withholding purposes. Or they be treated separately, with withholding taken from regular wages at a flat rate of 22%. (The rules for withholding are a little more complicated than explained here.) — Note Exception: Gifts with a de minimis (minimal) value, such as a flowers, a fruit basket, or a holiday ham of small value, are treated as a tax-free fringe benefit. But this exception does not apply to cash or cash equivalents (e.g., gift cards), which are treated as additional compensation no matter how little.
- Gifts to dealers, distributors, customers, clients, patients, etc. The cost of business gifts to these individuals is deductible, but only within limits. You may deduct only up to $25 per person per year (the dollar limit that was set back in 1962). This rule applies to both direct and indirect gifts. An indirect gift includes a gift to a company that is intended for the eventual personal use of a particular person or a gift to a spouse or child of a business customer or client. In applying the $25 limit, don’t count incidental costs, such as wrapping, insuring, or shipping the gifts.
Recordkeeping for gifts
Gifts to employees aren’t really gifts for tax purposes; as explained earlier, they are compensation. But gifts to clients, customers, vendors, and other business associates are deductible expenses as long as there’s proper substantiation. Keep a record of the cost of the gift, the date it was given, and a description of the gift. Also list the business reason for the gift or the business benefit gained or expected to be gained from providing it. Include the name of the person receiving the gift, his or her occupation or other identifying information, and his or her business relationship to you.
Business policy on office giving
Secret Santa gifts? Should employees be coerced into participating? What happens if someone is left out?
Insperity offers some good suggestions for a workplace gifting policy:
- Define what is and is not permitted.
- Keep gifts professional. Gag gifts may not be funny to everyone; they may be in bad taste.
- Make holiday gifting and gift exchanges (Secret Santa’s) voluntary. Consider setting spending limits.
- Remind employees of inclusivity. Make sure all are informed about a gift exchange; don’t leave anyone out of the loop.
“We make a living by what we get. We make a life by what we give.”—Winston Churchill
During this holiday season, I’m sure your generosity is appreciated!