If you own or run a business, you know how important it is to keep your staff feeling appreciated. Sometimes you will want to reward your staff members after a particularly big project or demanding event. Other times that you may want to give gifts to staff include holiday gatherings, birthdays, wedding and birth announcements and after a staff member loses a loved one. The IRS understands that businesses routinely give small gifts to employees and has established rules governing the deductibility of those gifts.
General Rules Regarding Gifts
Generally, the IRS allows businesses to make gifts to other businesses or individuals for the purposes of developing goodwill and a favorable business environment. There are two broad categories of gifts -- tangible gift items and entertainment. The IRS allows businesses to deduct gifts of up to $25 in value per recipient. If you make a gift to a client's or employee's wife, the IRS considers that to be a gift to the client or employee. If the gift is an entertainment expense, the IRS allows you to deduct half of the expense, as long as the expense is not exceedingly lavish or unreasonable.
De Minimis Fringe Benefits
The IRS also recognizes that employers frequently provide gifts or insignificant fringe benefits to their employees that cannot be reasonably tracked and expensed. Generally, if a business provides complimentary bagels to employees on an infrequent basis, or sends flowers to a staff member mourning the loss of a loved one or celebrating a new birth, this expense is deductible to the company but not taxable to the employee. Generally, if the gift is less than $100 in value, and is given infrequently by the company, or only on special occasions, there is no requirement to report this item as income.
Awards and Prizes
The IRS considers cash awards and prizes of any amount to be compensation and are, therefore, deductible to the employer. Awards and prizes are taxable to the employee, however; and as a business owner, you must track the award and report it on the employee's W-2 form. However, if the award is for longevity, safety or similar awards, you may only deduct $400 for awards not part of a qualified plan that does not discriminate against highly compensated employees, or $1,600 for all awards. For more details on this matter, see IRS Publication 535.
Reporting Gifts
For gifts of nominal value that you give to employees to promote goodwill, you can generally deduct the expense on your business tax return or on your Schedule C as a nonwage business expense. Deductible expenses include most meals you provide to employees and up to $2,000 in life insurance.
Tags: allows businesses, client employee, gift client, gift client employee, staff member