The holiday season is here. During this festive season, your business may want to show its gratitude to employees and customers by giving them gifts or hosting holiday parties. It’s a good time to review the tax rules associated with these expenses. Are they tax-deductible by your business, and is the value taxable to the recipients?
Customer and client holiday gifts
Gifts to customers and clients are tax deductible up to a maximum of $25 per recipient per year. For the $25 limit, you do not need to include “incidental” costs that do not significantly increase the value of the gift. Engraving, gift wrapping, packaging, and shipping are all included in the price. Also excluded from the $25 limit is branded marketing collateral — such as small items imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4 each.
The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (for example, a gift basket for all team members of a customer to share) as long as they’re “reasonable.”
Employee holiday gifts
Many businesses want to show their employees their appreciation during the holiday season. In general, anything of value that you transfer to an employee is taxable income (and thus subject to income and payroll taxes) and deductible by your company. However, there is an exception for noncash gifts that qualify as a “de minimis” fringe benefit.
These are items that are small in value and given so infrequently that they are administratively impracticable to account for. Holiday turkeys, hams, gift baskets, occasional sports or theater tickets (but not season tickets), and other low-cost merchandise are common examples.
Although de minimis fringe benefits are not included in an employee’s taxable income, they are still deductible by your company. Unlike customer gifts, there is no dollar limit for de minimis gifts. Many businesses, however, use an informal cutoff of $75.
Important: Cash gifts, as well as cash equivalents such as gift cards, are included in an employee’s income and subject to payroll tax withholding, no matter how small or infrequent they are.
READ MORE: Best Practices for Business Expenses
Throwing a holiday party
Under the Tax Cuts and Jobs Act, certain deductions for business-related meals were reduced, and the deduction for business entertainment was eliminated. However, there’s an exception for certain recreational activities, including holiday parties.
Holiday parties are fully deductible (and excludible from recipients’ income) so long as they’re primarily for the benefit of employees who aren’t highly compensated and their families. If customers and others also attend, a holiday party may be partially deductible.
Holiday cards
Sending holiday cards is a nice way to show customers and clients your appreciation. You can probably deduct the cost if you use the cards to promote your business. Incorporate your company name and logo, and you might even want to include a discount coupon for your products or services.
Spread good cheer
If you have any questions about the tax implications of giving holiday gifts or throwing a holiday party, please contact us.
Originally posted December 2019. Updated December 2023.