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.

Kingery & Crouse, P.A.

About the Author
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.