Holiday Tax Deductions

ASK MICKEY: Can I deduct holiday gifts to my clients and employees?
ANSWER: Yes, your company may want to express its appreciation to employees and customers by giving them holiday gifts or hosting holiday parties. It’s a good time to review the tax rules that apply to these expenses. Is your company able to deduct them, and is the value taxable to the recipients?
Customer and Client Holiday Gifts
Gifts to customers and clients are tax deductible up to a maximum of $25 per recipient per year. For the purposes of the $25 limit, you do not need to include “incidental” costs that do not significantly increase the value of the gift. Engraving, gift wrapping, packaging, and shipping are all included in the price. Branded marketing items, such as those imprinted with your company’s name and logo, are also exempt from the $25 limit if they are distributed and cost less than $4.
The $25 limit is for gifts to individuals. There is no set limit on gifts to a company (for example, a gift basket for all team members of a customer to share) if they are “reasonable.”
Employee Holiday Gifts
In general, anything of value that you transfer to an employee is taxable income and subject to income and payroll taxes and deductible by your company. However, there is an exception for noncash gifts that qualify as a “de minimis” fringe benefit.
These are small-value items that are given infrequently and are administratively impractical to account for. Holiday turkeys, hams, gift baskets, occasional sports, concert, or theater tickets (but not season tickets), and other low-cost merchandise are common examples.
Although de minimis fringe benefits are not included in an employee’s taxable income, they are still deductible by your company. Unlike customer gifts, there is no dollar limit for de minimis gifts. Many businesses, however, use an informal cutoff of $75.
Cash gifts, as well as cash equivalents such as gift cards, are included in an employee’s income and subject to payroll tax withholding, no matter how small or infrequent they are.
Company Holiday Party
In general, holiday parties are fully deductible and are excluded from the income of the recipients. In addition, a COVID-19 relief law for calendar years 2021 and 2022 provides a temporary 100% deduction for expenses of food and beverages “provided by” a restaurant to your workplace. Previously, these costs were only 50% deductible.
The phrase “provided by” a restaurant clarifies that the tax break for 2021 and 2022 is not limited to meals consumed on the premises of a restaurant. Restaurant takeout and delivery meals are also generally 100 percent deductible. So, this year, you can treat your on-location employees to holiday meals and get a full deduction.
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