The element of surprise and delight is at the heart of being a small business owner. But can it also benefit your tax bill?
Many small business owners like to show appreciation to their clients, customers, and team with thoughtful gifts. After all, you’re building a rapport with your clients and a bond with your team.
Whether in the form of cash, gift cards, or a token of appreciation, gifts come with tax implications that small business owners should take into account.
Below I’ll share everything you need to know about deducting gifts, as well as the rules that may have changed due to the Tax Cuts and Jobs Act.
Gifts for Team Members
Before you give a gift to an employee, there are two questions you should consider:
Is this gift taxable to my employee? Is this gift a deductible business expense?
The answer to these questions depends on the form and value of the gift.
If the gift is considered taxable income to the employee, you are required to withhold all applicable federal and state income and payroll taxes. You must also pay other employment taxes, such as federal and state unemployment taxes on these amounts.
Team Gift Type 1: Tangible Property
Gifts of property are not considered taxable income to employees as long as they fall under the definition of a “de minimis fringe benefit”.
According to the IRS, a de minimis fringe benefits is a gift “for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable and impractical.”
This might include the occasional snacks, coffee, and doughnuts, or holiday or birthday gifts with a low fair market value, such as flowers, fruit, books, etc.
The IRS does not specify a maximum dollar amount for excluding de minimis fringe benefits from an employee’s taxable income, but the business can deduct no more than $25 of a gift to any one person each year, including employees.
For example, say as a gesture of appreciation for working long hours on a project, you buy your employee $100 concert tickets. Only $25 of that gift would be a deductible business expense. The rest would be non-deductible.
Team Gift Type 2: Gift Cards and Certificates
Gift cards and gift certificates are considered taxable income to employees because they can essentially be used like cash. The cost of the gift card is fully deductible to the business, but you must withhold taxes from the employee’s pay for these gifts.
Team Gift Type 3: Awards
You can deduct up to $400 of the cost of employee safety and service awards of tangible personal property (such as a watch) for each employee for each year. Awards are not taxable income to employees, but they must be limited.
For service awards, they cannot be given during the first five years of the employee’s service and no more often than every five years. Safety awards cannot be given to more than 10% of employees during the same year.
The Tax Cuts and Jobs Act of 2017 (TCJA) clarified that awards of tangible personal property cannot include cash, cash equivalents or gift cards, vacation, meals, lodging, theater tickets, sports tickets, stocks, bonds, or similar investments.
When you record gifts to employees in yourContinue reading