written by Olivia Cole
It is that time of the year again! Time for office pot-lucks and secret Santa gift exchanges. While a profitable year may tempt an employer to be generous when providing gifts to employees and/or customers there are a few things to keep in mind.
Generally, holiday gifts made to customers are deductible as ordinary and necessary business expenses as long as the taxpayer can demonstrate that such gifts maintain or improve customer goodwill. The gifts should have a direct relationship to the taxpayer’s business and the cost must not be greater than the potential future benefit or expected financial return. However, the $25 annual limitation per recipient on deductibility is applicable to holiday gifts, unless a statutory exception applies.
As for gifts to employees, holiday turkeys and other distributions of nominal value made by an employer to promote goodwill are treated as tax-free gifts instead of as taxable compensation. It is important to be aware that cash, gift certificates or similar items that are readily convertible to cash are considered additional compensation regardless of the amount. If the gift certificate is only redeemable for merchandise then it is considered a tax-free gift.
A safe guideline to follow in order to avoid potential taxation is to keep the gifts at a “nominal” amount. What constitutes as a nominal amount is not exactly clear but keeping the gift under $25 is erring on the safe side. This also allows the employer to deduct the expense of the gift while not causing an additional tax burden on the employee. Gifts worth more, or a gift of any amount of cash, risks the IRS taking the view that the gift belongs in the employee’s gross income.
Please contact us if you have any questions 417-881-0145.