Are Employee Christmas Gifts and Holiday Gifts Tax Deductible?

The holiday season is a time of giving and expressing gratitude, not only among friends and family but also in the business world. Many companies choose to show appreciation to their valued employees, clients, suppliers, and associates by gifting tokens of goodwill during the festive season. While these gestures are heartwarming and reflect positively on a company's image, it's important to be aware of the tax implications that accompany these acts of generosity. In this blog post, we'll delve into the intricacies of tax considerations for businesses when it comes to holiday gifting, helping you navigate the festive season with financial wisdom.

Christmas Gifts Gifts To Employees

1. Non-cash items

According to IRS's Chief Counsel Advice Memorandum 200108042, employee Christmas gifts are tax deductible for businesses. Businesses can report the money spent on Christmas or holiday gifts as an expense and hence reduce their tax liabilities. Christmas gifts are taxable for employees if the tangible gifts cost more than $100 or are in cash or gift card form (irrespective of the amount).

If the non-cash Christmas gifts are infrequent and worth less than $100, they are considered "De Minimis Fringe Benefits” and are non-taxable for employees. Employees don’t need to show such gifts in their W-2 form. However, if the Christmas gift’s value is more than $100, it is taxable for the employee.

Hence, if a business distributes turkeys, hams, or other holiday merchandise of nominal value (less than $100) to its employees, the value of these items would not constitute salary or wages, and the employees don’t need to pay taxes on the same.

What is De Minimis Fringe Benefit?

According to the Internal Revenue Service (IRS), any non-monetary gift that has so little value that accounting for it would be unreasonable or administratively impracticable is considered to be De Minimis Fringe Benefit.

Here are the examples.

·      Holiday gifts, goodie bags, or swags with a low fair market value.

·      Coffee, doughnuts, or soft drinks are furnished to employees.

·      Occasional tickets for entertainment events.

·      Occasional parties or picnics for employees and their guests.

·      Intermittent meals, meal allowances, or local transportation expenses, not contingent upon hours worked, are granted to an employee due to their overtime work, and, in the case of meals and meal allowances, furnished to facilitate the employee's ability to work extended hours.

Check this out: Awesome tax-deductible holiday gifting options for employees.

2. Cash/gift cards/ cash equivalent

If businesses offer their employees Christmas gifts, Thanksgiving gifts, or holiday gifts in the form of cash, gift cards, or cash equivalent, such expenses are considered business expenses and eligible for a deduction.

For employees: Gifts received in the form of cash, gift cards, or cash equivalent, are always considered a part of an employee’s wages, and are taxable, irrespective of such cash gift’s value.

Advice to businesses: It is highly preferable for businesses to give employees holiday gifts in tangible form instead of cash/gift cards. Holiday gifts valued less than $100 are non-taxable for employees while cash/gift cards are considered part of employees' income and are taxable, irrespective of the value of such cash/gift cards.

Christmas Gifts To Customers, Clients, Suppliers, and Other Stakeholders

According to the IRS, when businesses offer Christmas or holiday gifts to stakeholders other than employees (key customers, clients, donors, suppliers, etc.) within the scope of their professional activities, they are eligible to deduct a maximum of $25 for each business gift provided to an individual, either directly or indirectly, during the tax year.

You can claim a total of $25 deduction per person once in a single tax year, even if the gift value is more than $25 and you have offered it on more than one occasion.

Here are some rules for holiday gifts

·      To substantiate the business purpose of the gift and the precise amount spent, maintaining comprehensive records is essential.

·      If you and your spouse jointly provide gifts to the same person, the IRS treats both of you as a single taxpayer.

·      Incidental costs such as engraving, packaging, or shipping are not counted within the $25 limit if they do not significantly enhance the value of the gift.

·      When calculating the $25 per person limit, gifts costing $4.00 or less, featuring your business name permanently engraved and distributed regularly, need not be considered.

·      Any item that could be perceived as either a gift or entertainment is typically classified as entertainment and does not qualify for the deduction.

Check this out: Tax-deductible holiday gifting options under $25 for clients, suppliers, and other stakeholders.

FAQs

1. Are gift cards to employees tax deductible?

Yes, gift cards to employees are deductible for businesses, irrespective of the value of such gift cards. However, the value of such gift cards is considered a part of an employee's salary/wages and is taxable for them.

2. Are employee Christmas gifts tax deductible?

Yes, employee Christmas gifts are considered a business expense and are tax-deductible for businesses. For employees, Christmas gifts and holiday gifts are non-taxable if the gift' value is less than $100, such gifts are in non-cash form and are given occasionally. Such gifts are known as De Minimis Fringe Benefits. It means, that if the gift's value is more than $100 or the gift received is in cash or gift card form (irrespective of value), employees must pay taxes on them.

3. Are Christmas gifts to customers, clients, suppliers, and other stakeholders deductible?

As per the guidelines provided by the IRS, businesses can claim deductions for Christmas or holiday gifts given to stakeholders (other than employees) such as key customers, clients, donors, and suppliers, as part of their business operations. These deductions allow a maximum of $25 for the business gift offered to an individual, whether given directly or indirectly, throughout the tax year.