As we approach the holiday season, employers everywhere are giving gifts to their employees to mark the festivities and show their appreciation for a job well done. If those gifts are in compliance with the Internal Revenue Code, the employers can get a gift of their own – in the form of a valuable tax deduction! Read on to find out how.
Under Section 274 of the Internal Revenue Code, employers may deduct the expenses of nominal gifts given to their employees. Such deductions are limited to $25 per employee, per year.
There are two exceptions to these nominal items which are not gifts:
An example of a nominal gift may be the gift of turkeys at Thanksgiving. Such a gift is given to employees mainly to promote good relations and can be deductible as a non-payroll expense (which means no FICA withholding).
Section 274 continues to describe the deductibility of achievement awards, but what are those exactly?
An employee achievement award is a piece of tangible personal property given to an employee due to a length of service or safety achievement being reached. This tangible personal property cannot include cash, cash equivalents, gift cards, gift coupons, gift certificates (unless previously selected), vacations, meals, lodging, tickets for theatre/sporting events, stock, bonds, or similar items. Additionally, the award must be given as part of a meaningful ceremony significant enough that there is no likelihood that the award is disguised compensation.
An employer may deduct the cost of employee achievement awards up to $400 per employee, per year. This limit may be raised to up to $1,600 per employee, per year if the award is a qualified plan award.
A qualified plan award is a reward that is part of a permanent, written, nondiscriminatory plan for awarding employee achievement, maintained by the employer. A qualified plan must also ensure that the value of all achievement awards given in a year have an average cost of $400 or less.
Additionally, there are limitations on how often these awards can be given while remaining tax deductible. A deductible length-of-service award can not occur within the first 5 years of an employee’s employment and cannot be awarded more often than every 5 years. A deductible safety achievement award cannot be given to managerial, administrative, professional, or clerical employees, and it cannot be awarded to an employee if more than 10% of all other employees have already received such an award in the same year.
While some monetary rewards to employees may take the form of discretionary or holiday bonuses, it is important to understand that these disbursements are still wages, not gifts.
If a taxpayer gave a small cash bonus to each of his employees each Christmas, these payments would be considered wages, even if they were not reported as such. Despite not being deductible as gifts, the bonuses would still be an ordinary and necessary business expense, as they boost employee morale.
Finally, once you identify what qualifies as a gift, it is important to substantiate these gifts to ensure a deduction.
Employer gifts will not be tax deductible unless the taxpayer is able to substantiate all of the following:
MRPR is ready to help you navigate the employee gift rules. With our assistance, you can make the holidays extra special for your employees!