I know; I know…when you’re shopping and party-planning for the holidays, you’re likely not considering the deductibility of your expenditures. But be careful in your partying and your gift-giving – or you could end up giving your favorite uncle a celebration, as well. Following are a few guidelines for your business holidays.
You’re allowed to spend whatever you like, but you’ll only be able to deduct $25 per person per year. In the case of a couple, they count as one person, so you may only deduct $25 of gifts to that couple during the year. This limit does not include ‘incidental’ costs such as gift wrap, engraving, shipping, etc, as these add nothing to the value of the gift.
But, of course, there are loopholes. When the client gift exceeds the $25 maximum, perhaps entertainment gifts might be a better option. So, what are entertainment gifts? These gifts generally include tickets to concerts, sporting events, movies, etc. You may deduct 50% of the cost of entertainment gifts.
Also, instead of gifting one individual, consider sending a gift basket or similar gift to the client’s staff. These are also not subject to the $25 limit.
Another opportunity here encompasses certain gifts commonly given where: the value is minimal ($4 or less), it’s engraved with your company name/logo and/or the gifts are identical to others you distribute. This would include such items as mugs, keychains, pen sets, etc. These are 100% deductible.
The rules are a little different for gifts given to employees. If the gifts are de minimis (of minimal value, for example, food items, small gift cards, etc), the company can deduct these and they are not included in the employees’ pay. These are deductible 100% up to a maximum of $25 per employee per year.
If the gifts are larger (holiday bonuses, awards, etc), the company can deduct them, but they must be reflected in the employees’ pay. For purposes of withholding, they are treated as any other supplemental pay; withholding is generally at the highest federal and state rates.
Holiday parties you host for your employees and their families are 100% deductible; they are not subject to the 50% limit. Also, holiday parties to which you invite the general public are 100% deductible.
However, holiday parties you host for clients are deductible at 50%, same as other meals and entertainment. Further, they must have a “substantial” business component. If the purpose of the party is to promote goodwill, or something of the sort, no part of it is deductible.
Be careful of inviting your friends. If your friends are not clients or employees, NO portion of the cost of the event attributable to them is deductible.
So, for example, your holiday party to which you’ve invited 10 employees, 10 clients and 10 friends cost $1800. You will be able to deduct $900: $600 (100% of $1800/3) for your employees, $300 (50% of $1800/3) for your clients and $0 for your friends.
Of course, documentation will be key. Maintain a copy of the invitation for your records; make certain the business purpose of the event is on the invitation. Keep a list of the invited guests. And, if you’re really brave, a video of the event would be priceless.
Be sure to account carefully for miles driven during the holidays. If you’re attending a company or client event these are considered business miles. When you hit the stores to purchase gifts for clients and employees, this mileage is also considered business. Therefore, plan your holiday driving carefully so as to maximize your deductible miles.
So, this holiday season be generous with your employees and clients, but not so much so your Uncle Sam. Shop carefully and maximize your holiday season write-offs.
And should you have any questions regarding these or other tax matters, please give us a call at