We know you have researched online, extensively, but you probably couldn’t find much about corporate gifting tax. There is no blog post that talks about tax on corporate gifting in detail, although it is a topic that a lot of HR managers, salespersons, and marketers often have to look into when conducting any corporate gifting campaign, for any possible reasons.
Moreover, whether you are a giver or a recipient, you must file tax each year. So it makes it more important for you to understand how taxes work for corporate gifts.
Whether you are the sender or the recipient of a corporate gift, you must understand the corporate gifting tax rule. This way you will be able to avoid unnecessary troubles, and even take advantage of it to save some money.
In this article, Giftpack with go over the most important things you need to know about taxes for corporate gifts, as well as some ways that you can increase your tax deduction on employee gifting or client gifting. Without further ado!
What Is Considered A Business (Corporate) Gift?
According to IRS standards, for a gift to be considered a business (corporate) gift, it must be an item that is given to direct customers, clients, or employees to benefit your company ultimately.
Let’s take a look at some examples:
- A promotional gift or giveaway at an event to build brand awareness.
- A company swag for your employees to increase employee satisfaction and productivity.
- A client gift for your existing customers to appreciate their loyalty.
For Givers
As the giver (most of the time employer), most certainly, you have considered buying or have already brought gifts for clients or associates. It is a great way to express appreciation for their support and hard work.
According to Forbes.com, businesses spend $125 on average per gift, where $75 to $100 is a sweet spot for any gift. However, to avoid HRMC repercussions, it’s important to know how much you can claim on expenses and the types of gifts you can claim.
One of the reasons that companies avoid spending too much is due to the gift tax deduction. Gifts are deductible, as long as you meet the tax conditions.
$25 Corporate Gifting Tax Deductibles
Normally, your gift tax deduction limit is $25 per person. However, this limit does not include any incidental expenses, for example, shipping, packaging, and handling of the gifts. This means anything you do for the gift, other than the cost of the gift itself, can still be deducted through other ways – hint, look into incidental costs for gifts.
Of course you can buy a gift of higher value than this $25. However, only $25 will be deducted when you file your tax, and your business must compensate for the rest of the cost.
Another thing to note is that only direct gifts qualify for a deduction. Direct gifts are those offered to employees, clients, and customers, whereas indirect gifts are gifts given to relatives or people connected to these groups.
A few things that you, as an employer, should keep in mind:
- If you are giving an entertainment-focused gift(tickets to an event or movie), you must not be among the people going to such event.
- If you are giving packaged food to be consumed at a later time than first receiving them, then it can be considered a deductible business gift.
- If you are giving a cash bonus as a gift, note that it is not deductible at all.
Exceptions
Here’s a quick rundown of exceptions to the $25 tax deduction limit:
Gifts to a business entity.
The $25 limit applies only to gifts directly or indirectly given to an individual. Gifts given to a company for use in the business are NOT subject to the limit.
Examples:
- A gift of a reference manual to a company for its employees to use while doing their jobs.
- A set of work-from-home supply kit to improve productivity for employees working from home.
Gifts to a married couple.
Gifts to spouses will increase the tax deductible limit from $25 to $50. The precondition is that the business has a connection with both If you have a business connection with both spouses.
Gifts to employees.
A gift to your own employees is very different from sending gifts to clients or prospects. Although it has its own limitations and can often be treated as taxable compensation, an employer is generally allowed to deduct the full cost of gifts made to employees.
Incidental costs of a gift.
An incidental cost for making a gift isn’t subject to the $25 tax deductible limit. Anything other than the gift itself can be tax deductible through incidental expenses.
Examples:
- The costs of customization for a gift.
- Packing and shipping fees of a gift.
- The insurance of the gift.
De Minimis Fringe Benefits.
De minimis fringe benefits are not very hard to understand. They are benefits granted to employees by the employers. The values of these benefits are so small that they can be excluded from the taxable income of employees, yet be fully deducted for the employers. Per the IRS, examples of de minimis fringe benefits are as below:
- Occasional small gifts like holiday presents, birthday presents, etc.
- Occasional meal or party money such as cocktail parties, birthday parties, etc.
- Occasional snacks.
- Occasional gift baskets or books.
- Occasional tickets to entertainment events.
- Group term life insurance with a face value of $2,000 or less.
- Use of office supplies including a copy machine, fax machine, office phone, staplers, etc.
- Educational assistance.
Gifts vs. Entertainment Expenses
Note that is still a working progress. Entertainment expenses, like a sporting event or tickets to a show, are still non-deductible. However, team-building activities for employees are deductible.
Team-building activities, including the purchase of tickets for your employees is fully deductible. The tax code states that “expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees” qualify for the 100% deduction.
High-end restaurants, beverages (including alcohol) are also 100% deductible for business purposes.
Gifts vs. Promotional Expenses
Promotion and advertisement expenses are not subject to a $25 limit and therefore are generally more beneficial than deductions for business gifts.
Sometimes a gift can qualify under promotional expenses. For example, if the product was given to your customers as part of a promotional campaign, the related cost would be a promotional expense, which is not subject to the $25 limit. However, if the product is given to the customer out of value and appreciation, then it would be categorized as a gift and is subject to the $25 limit.
As for a potential client or customer the gifts that you prepared must have the following trades to be treated as an advertising expense:
- Must have your business name imprinted on the item.
- Must be under $4 per gift.
- Must be identical items.
If everything checks out, you can fully deduct the expense of these items without keeping receipts.
Documentation & Tracking
Now that you know all about corporate gifting tax and deductibles. You must keep records to ensure you can exercise your rights. To the extent your business qualifies for any of the exceptions mentioned above, make sure you keep track of the expenses separately (an easy way is to charge them to a separate account in your accounting records) so that a full deduction can be claimed.
Other than that, retaining documentation is also essential to filing tax deductions for these gifts. You will need to let the IRS know:
- A description of the gift.
- The cost of the gift.
- The date the gift was made.
- The business purpose of the gift.
- The business relationship to the taxpayer of the person receiving the gift.
For Recipients
If it all seems too complicated, just remember these few points! For gifts, awards and incentives:
- All amounts of cash or gift cards redeemable for cash are taxable.
- Gifts of minimal value are not taxable for employees. The minimal value is generally $25 to $75 per employee each year. Gifts worth more than that are taxable.
- Gifts awarded for length of service or safety achievement are not taxable to the limit of $1,600 worth for one employee in a year.
- Monetary prizes and non-monetary bonuses awarded for any goal reached, are taxable compensation — not only for income taxes, but also for FICA and unemployment taxes, tax withholding applies.
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