 Accounting
Best Practices
Holiday Gift Giving
Don’t Get Scrooged
By Tatiana Gilberston
We know it’s hard to
believe, but the year-end holidays are quickly
approaching, and that means it’s time to think about
gift giving and bonuses. These gifts and bonuses offer a
great opportunity to achieve goodwill by rewarding
certain employees, and even better – while you receive
all the credit for these gifts, your Uncle Sam generally
will pay a portion of the related costs.
A large number of employers
are not aware of the tax consequences arising from gifts
given to employees, customers or suppliers. The #1 rule
is simple and easy to remember “Cash is always taxable.”
Below are some additional rules that will help you make
better decisions for the benefit of your business and
your employees.
De minimis fringe benefits
are benefits offered infrequently with a nominal fair
market value (as defined below). The moment the employer
begins to calculate the value of the benefit to
determine whether it is taxable or not, it ceases to be
a de minimis fringe benefit. In other words, calculating
its value is an administrative burden and therefore the
benefit becomes taxable. If a benefit qualifies as a de
minimis fringe, it is excluded from the employee’s gross
income and the employer is not required to report or pay
any federal taxes on the amount.
Although it is not a written
rule, it is generally accepted that a gift to an
employee is considered de minimis if:
-
The value is nominal
(generally $25 or less)
-
Accounting for the item
would be administratively impractical
-
The gift is provided
infrequently
-
The gift is furnished to
promote health, goodwill, contentment, or efficiency of
employees
Irrespective of the above,
always remember that Rule #1 (“Cash is always taxable”)
applies to gift certificates or comparable items that
could be easily converted to cash. Accordingly, such
items should be considered additional wages or salary
regardless of the amount.
For example, assume an
employer decides to take his employees to the state
fair. He pays for the tickets, as well as food and
refreshments, in advance and also provides perhaps the
biggest benefit of all – A DAY OFF! On the day of the
event, the employer also gives each employee $15 for
incidentals. The value of the tickets, food and
refreshments are not included in gross income. (The day
off is income because the employees are paid). However,
in keeping with Rule #1, the $15 should be included in
each employee’s gross income. The same could be said of
other firm outings where all employees are invited to
attend. Assuming the costs incurred are “ordinary and
reasonable,” such costs are generally deductible, and as
long as there is no cash gifted to the employees, there
is nothing taxable for the employees.
Other de minimis fringes
that could be used to reward a job well done or
acknowledge a good working record, and still be deducted
in full, are as follows:
-
Traditional birthday or
holiday gifts of property with a nominal fair market
value
-
Presents such as books or
flowers provided to employees under special
circumstances (i.e. due to illness, exceptional
performance, etc.)
-
Traditional awards upon
retirement after lengthy service for an employer
In addition, under certain
circumstances as described below, employee achievement
awards (i.e. tangible personal property given to an
employee for any one of the following two reasons) can
generally result in a tax deduction without giving rise
to employee compensation:
1. Safety achievement Awards
- To qualify, these awards cannot be given to (i) a
manager, administrator, clerical employee or other
professional employee; or (ii) more than 10% of the
employees during the year, exclusive of those in (i).
2. Length of service Awards
- To qualify, these awards cannot be given (i) during
the first 5 years of employment; or (ii) to an employee
who received a length-of-time award (other than of de
minimis value) during the current year, or in any of the
prior four years.
Both awards must be given as
part of a meaningful presentation, and the conditions
surrounding the event cannot create an illusion of
disguised pay. Furthermore, in order for an employee
achievement award to be considered qualified (i.e.
excludable from an employee’s taxable income), it must
be gifted as part of an established written plan that
does not discriminate in favor of highly compensated
employees. Finally, to be deductible, the average cost
of all employee achievement awards given during the year
(excluding those of nominal value), cannot exceed $400.
If an employee achievement award does not meet these
criteria it will be considered non-qualified, and
therefore generally includable in the employee’s income.
There are other working condition fringe benefits that
companies can use throughout the year that may keep the
holiday cheer going. So in order to minimize the
possibility of having somebody, including yourself, say
or think “BAH HUMBUG”, you should seek tax counsel to
make sure you are getting the most cheer for your bucks.
Tatiana Gilberston is a member of the Tax team at
Kingery & Crouse. A graduate of the University of South
Florida with an MBA degree, she has previously worked on
the Audit team. Tatiana speaks English, Spanish & German
fluently. Kingery & Crouse, P.A. is a full service
public accounting firm with a staff of 23 dedicated
professionals providing tax and accounting services,
including audits of SEC companies. You may contact
Tatiana at (813) 874-1280 ext #228. Find us on the web @
www.tampacpa.com.
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