‘Tis the Season for Holiday Gift and Party Tax Breaks

With the year-end holidays upon us, it’s time for business owners and leaders to keep tax considerations in mind as they plan gifts and parties for clients and employees.

This festive season is traditionally an appropriate time to show appreciation for customers and team members. However, you want to understand how to do this while maintaining tax deductions for your company and without creating tax obligations for your employees.

The IRS defines a business gift as a tangible item that’s given in the course of your trade or business. This usually includes anything of value transferred from one person to another without receiving anything of equal or greater value in return.

Cash and gift cards, which contain a cash-equivalent value, are not considered deductible gifts Additionally, event tickets generally fall into the non-deductible “entertainment” category.

Under IRS regulations, a direct gift is intended for a specific recipient. An indirect gift is intended to be used by a customer’s spouse or family, or by several employees (such as having lunch delivered to a client site).

Deductible client gifts generally must be valued at less than $25 made to an individual customer per year. If, for instance, a small-business client has two partners, you can deduct one $25 gift.

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.

There isn’t a specific limit for gifts made to a company that includes all their team members, such as buying a lunch or holiday gift baskets, if the costs are considered reasonable.

To support the deductibility of a gift, you should prepare and retain detailed documentation including:

When planning holiday gifts, it’s important to understand that some organizations have policies that limit their value or prohibit giving them to employees. If you’re unsure, check with your client to prevent a potentially awkward situation.

Non-cash employee gifts are generally deductible, provided they qualify as de minimis fringe benefits. To be a deductible de minimis fringe benefit, the gift’s value should be so small that accounting for them would be unreasonable or impractical, considering the frequency with which the employer provides similar benefits to other employees.

Deductible noncash gifts may include food items, lower-cost tech accessories, occasional theater or sporting event tickets, or similar items.

Cash bonuses, as well as cash equivalents such as gift cards, given as a reward for achieving a milestone, celebrating strong performance, or expressing gratitude for an employee’s performance, is considered part of the employee’s taxable wages. As such, they are subject to payroll withholding and are reported as part of their W-2 income.

Holiday gatherings where you invite employees and their guests are generally fully deductible. If you invite a blend of clients and employees to the same event, it will become partially deductible. To maintain deductibility, it’s important to invite all organization members or a business unit. Also, the party should not be lavish or extravagant.

The 100% deductibility threshold for food and beverage expenses provided by a restaurant to a workplace during calendar years 2021 and 2022 as a COVID-19 relief has expired. In 2023, the pre-COVID 50% deductibility limit has returned.

Contact us if you have questions about potential business tax breaks related to giving client or employee gifts or throwing a holiday party.