Businesses can show appreciation — and gain tax breaks — with holiday gifts and parties

With Christmas just around the corner, the holiday season is upon us. At this time of year, your business may want to show its gratitude to employees and customers by giving gifts or hosting holiday parties. Now is a good time to brush up on the tax rules associated with these expenses. Are they tax deductible by your business and is the value taxable to the recipients?

Gifts to Customers
If you make gifts to customers and clients, they’re deductible up to $25 per recipient per year. For purposes of the $25 limit, you don’t need to include “incidental” costs that don’t substantially add to the gift’s value. These costs include engraving, gift wrapping, packaging and shipping. Also excluded from the $25 limit are branded marketing items — such as those imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4.

The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (for example, a gift basket for all team members of a customer to share) as long as the costs are “reasonable.”

Gifts to Employees
In general, anything of value that you transfer to an employee is included in his or her taxable income (and, therefore, subject to income and payroll taxes) and deductible by your business. Cash gifts include cash equivalents, such as gift cards. There’s an exception for noncash gifts that constitute a “de minimis” fringe benefit. These are items that are small in value and given infrequently that are administratively impracticable to account for. Common examples include holiday turkeys, hams, gift baskets, occasional sports or theater tickets (but not season tickets) and other low-cost merchandise. De minimis fringe benefits aren’t included in an employee’s taxable income yet they’re still deductible by your business. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts.

Throw a Holiday Party
Holiday parties are fully deductible and excludible from recipients’ income.

Staff Meals
For calendar years 2021 and 2022, a COVID-19 relief law provides a temporary 100% deduction for expenses of food or beverages “provided by” a restaurant. Previously, these expenses were only 50% deductible.

The use of the words “provided by” a restaurant clarifies that the tax break for 2021 and 2022 isn’t limited to meals eaten on a restaurant’s premises. Takeout and delivery meals from a restaurant are also generally 100% deductible. So you can treat your staff to some holiday meals this year and get a full deduction.

Contact us if you have questions about the tax implications of giving holiday gifts, meals or throwing a holiday party.