by LawInc Staff
November 27, 2017
With the holidays approaching, it is important for business owners to consider what expenses are and are not tax deductible.
Throwing fancy holiday parties, purchasing gifts and providing employee bonuses can get expensive. Being aware of IRS rules governing gift taxes and deductions can help minimize tax payments.
Not only do employers receive tax benefits from giving the gifts, but employees may be able to deduct some gifts as well. It is important to review all exemptions and exceptions that apply to business gifts because the IRS generally categorizes all gifts as income.
Business owners and employers are always giving gifts to their employees and clients throughout the year and specifically during the holiday season. When selecting what gift to give, business owners often forget that only a portion of the gift may actually be deducted as a business expense.
Therefore, before choosing that $350 Montblanc pen or that $180 bottle of Blue Label keep in mind that the IRS only allows a maximum of $25 to be deducted per person for business gifts. The $25 is applied per person for the entire tax year and any amount beyond the $25 cannot be deducted. Therefore $325 of that pen will not be allowed as a deduction.
Also, it is important to note the $25 does not include incidental costs, costs that do not add substantial value to the gift. Examples of these costs include the cost of wrapping, packing and shipping the gift, or personalizing the gift. These costs cannot be added to the value of the gift for the purpose of deducting it on your tax income.
Meals & Entertainment
The IRS allows business owners to deduct 50% of all “ordinary and necessary” business meals and entertainment expenses related to entertaining clients or employees.
The limit however is that the entertainment and or meals must be reasonable given the circumstance, not lavish nor extravagant and must be related to the business.
These gifts must be for the benefit of the employee or other clients, not for the owner’s family members or friends with no vested interest in the company.
Entertainment includes activities that provide amusement or recreation for clients such as tickets to a basketball game, movie tickets or a concert.
However, there is a catch. In order to reap the benefits of this tax exception, a director and or the owner of the business must also attend the event. If you give the clients or employees the tickets but choose not to attend it will be subject to the $25 gift limitation.
Therefore, depending on the cost of the gift, it may be more profitable for a business owner to attend with the gift recipient.
The IRS imposes a flat 25% tax rate on all supplemental wages given to employees, including bonuses. The rate will be imposed on the bonus separately and directly.
Therefore, many employers take into account the taxed amount and choose to give their employees a greater bonus.
For example, a bonus of $2,000 will be reduced to $1,500 after taxes. An employer genuinely interested in giving their employees a $2,000 bonus may want to consider raising their bonus to guarantee their employees get the entire amount.
Holiday parties are usually an event that all employers and employees look forward to. It is a chance for everyone to let loose, get friendly and bond over drinks and dinner.
The next great part is that the IRS allows employers to throw holiday parties without suffering any tax consequences. The entire cost of holiday parties or summer events are 100% tax deductible.
There is however one condition, the party must be for employees and their spouses and or significant others only. A holiday party that includes customers, clients and or independent contractors is not 100% tax deductible. Rather, it will fall under the “Meals & Entertainment” category and subject to a 50% limit.
100% of the costs associated with the employees and their spouses can be deducted. Only 50% of the costs associated with the clients, customers or independent contractors can be deducted.
Promotional Items & De Minimus Gifts
The cost of promotional items given to clients such as key chains, company pens, calendars or widely distributed items that have the company’s name and or logo permanently engraved in it costing less than $4 can be deducted without limitation.
Keep Records and Receipts
Keep in mind that it is important to keep a record of all gifts and expenses for your CPA when it is time to file taxes. Keep a log of dates, client and employee names and the amount spent on each gift. Also keep receipts as proof of your deduction if it comes down to an audit.
Consult With a Tax Professional
Gift taxes can get complicated, for further tax questions, speak to a CPA who can better assist with your concerns.