The holiday season is here! It’s a time to express gratitude to your employees and customers, whether through thoughtful gifts or festive gatherings. But before you start planning, let’s review how these expenses might impact your taxes. Are they deductible for your business? And are they taxable for the recipients?
Gifts for Employees
Showing appreciation to your employees is a wonderful way to spread holiday cheer. However, tax rules apply: most gifts to employees are considered taxable income, which means they’re subject to payroll and income taxes.
The Exception: Small Noncash Gifts
Noncash gifts that qualify as “de minimis” fringe benefits can avoid this tax hurdle. These are small, infrequent items that are difficult to track and account for, such as:
- Holiday turkeys or hams
- Gift baskets
- Occasional event tickets (not season passes)
- Low-cost merchandise
These gifts are not included in your employees’ taxable income but are still deductible for your business. While there’s no hard dollar limit, many businesses use $75 as a general guideline.
Important: Cash gifts and cash equivalents (like gift cards) always count as taxable income, regardless of the amount or how rarely they’re given.
Gifts for Customers
Giving gifts to customers is another great way to spread goodwill, but the tax rules are a little stricter:
- Deduction Limit: You can only deduct up to $25 per recipient, per year.
- Incidental Costs: Expenses like engraving, gift wrapping, or shipping don’t count toward the $25 limit.
- Branded Items: Small, widely distributed items with your company name (like pens or mugs costing under $4) are not subject to the $25 cap.
For gifts to entire teams or companies (like a shared gift basket), there’s no set dollar limit—just ensure the cost is reasonable.
Hosting a Holiday Party
Good news! If you’re throwing a holiday party, it may be fully deductible. For the party to qualify:
- It must primarily benefit employees who aren’t highly compensated, along with their families.
- If customers or others attend, the event may only be partially deductible.
Unlike meals or entertainment deductions, holiday parties have a unique advantage—they’re not subject to the same strict limitations under tax law.
Sending Holiday Cards
Sending holiday cards is a simple yet meaningful way to show your appreciation. If you incorporate your business name and logo, the cost is likely deductible as a marketing expense. You could even include a discount coupon for your products or services to add an extra touch.
Festive Gestures That Count
Holiday gifts and parties can boost morale and strengthen relationships, but it’s important to understand the tax implications. If you have questions about navigating these rules, we’re here to help. Contact us to help make sure your holiday gestures are both heartfelt and tax-smart!