With the holidays fast approaching, you might want to reward your employees for all their hard work in 2018. Gift-giving ideas include gift cards, holiday turkeys and achievement awards.
Although your intent may be essentially the same in all these situations, the tax outcome for recipients of your goodwill may be quite different. Typically, it depends on the value and type of gift or award.
What Are the Rules for Business Gifts to Customers?
If your business gives gifts to customers, clients or other contacts during the holiday season, you may be able to deduct all or part of the cost. But there are strict tax-law limits to your generosity.
In general, the deduction for these types of business gifts is limited to $25 per recipient during the tax year. A gift to a company that is intended for a particular person is considered an indirect gift to that person.
If you give a gift to a member of a customer's family, the gift is generally considered an indirect gift to the customer. However, this rule doesn't apply if you have a bona fide, independent business relationship with the family member and the gift isn't intended for the customer's eventual use.
If you and your spouse both give gifts to a customer, the two of you are treated as a single taxpayer. Thus, your combined limit is $25 per recipient. It doesn't matter if you have separate businesses, are separately employed or whether you each have an independent connection to the customer. Similarly, if a partnership gives a gift to a customer, the partnership and its partners are treated as one taxpayer.
Finally, there's some leeway on the $25 limit. Incidental expenses — such as engraving, packaging, insurance and shipping costs — don't count towards the cost of a gift.
The Tax Cuts and Jobs Act (TCJA) clarifies the tax treatment of certain achievement awards of property. This provision applies to amounts paid or incurred after 2017, including gifts made during this holiday season.
As a general rule, amounts effectively paid for services rendered are taxable, similar to other forms of compensation. Therefore, year-end bonuses, commissions and similar payments made in 2018 are subject to tax in 2018. They're also deductible by the employer in 2018.
However, if a year-end bonus is delayed until January, it's taxable to the employee in 2019. And a calendar-year business can't deduct it until 2019.
The tax rules for achievement awards are slightly more complicated. For these purposes, an "achievement award" is an item of tangible personal property given to employees for length of service or for promoting safety. Examples include watches, electronic devices, golf clubs and jewelry. In the past, there was some uncertainty about other types of property.
Clarity under the TCJA
The TCJA specifically excludes the following items from its definition of "tangible personal property":
Cash and cash equivalents,
Gifts cards, gift coupons and gift certificates (other than those where from the employer preselected or preapproved a limited selection),
Tickets for theater or sporting events, and
Stocks, bonds or similar items.
This TCJA provision is similar to proposed regulations that were issued under prior law. It's also comparable to the position stated by the IRS in Publication 15-B, Employer's Tax Guide to Fringe Benefits. That publication has no formal authority, however.
There other tax rules pertaining to achievement awards provided through a company plan. To qualify for tax-free treatment to recipients, the following requirements must be met:
Any employee can receive a length-of-service award, but safety awards can't be made to managers, administrators, clerical workers and other professional employees.
The award doesn't qualify if the company granted safety awards to more than 10% of the eligible employees during the same year.
The award must be part of a meaningful presentation.
The employee must have worked for the company for a minimum of five years to receive a length of service award.
Additionally, if a company uses a "nonqualified plan," an employee may receive up to $400 in awards without owing any tax. This tax-free amount is quadrupled to $1,600 for awards through a "qualified plan." Any amount above these limits is taxable to the employee and can't be deducted by the employer.
Two additional requirements must be met for qualified plans.
The award must be paid under a written plan that doesn't discriminate in favor of highly-compensated employees (HCEs).
The average cost of all employee achievement awards granted during the year can't exceed $400.
De Minimis Gifts
How about small tangible gifts, such as turkeys or hams, given to employees? Such gifts may be excluded from taxable income under a special "de minimis rule." A de minimis benefit is one that is so small as to make accounting for it unreasonable or impractical. Many small holiday gifts are covered by this exception.
In determining whether the de minimis rule applies, consider the frequency and the value of the gifts. One critical factor is whether the benefit is occasional or unusual. Also, the gift can't be a form of disguised compensation.
If a benefit is too large to qualify as a de minimis benefit, the entire value is taxable to the employee, not just the excess over a designated de minimis amount. Previously, the IRS has ruled that items with a value exceeding $100 could not be considered a de minimis benefit, even under unusual circumstances.
'Tis the Season
Make this a happy holiday season from both a gift-giving and tax viewpoint. Stay within the boundaries discussed above to maximize the benefits for employees and employers. If you have questions about the business gift-giving rules, contact your EHTC Tax Advisor.