Know the Tax Rules for Business and Employee Gifts

Giving business gifts is a time-honored way of doing business, but there’s a right way and a wrong way to go about it. While many believe there is no limit on the amount claimed as a tax deduction for gifts to business associates, in fact, the U.S. tax code only allows a deduction of $25 per nonemployee recipient annually.

Tickets to events, such as concerts and ball games, are treated as entertainment expenses. Restaurant gift certificates are considered meal expenses; only half of entertainment and meal expenses are tax-deductible.

Employees

Special tax rules apply to employee gifts. Giving employees cash or equivalents, like gift cards, of any amount is considered taxable compensation. The gift amount is added to wages and is subject to payroll taxes.

Businesses can give nominal cost noncash gifts to employees, but the important word here is nominal. While the application is often vague, and it’s always wise to check, a gift such as a voucher for a free hotel stay typically is not subject to taxes.

Award programs

Employees also don’t incur taxable wages if a gift is received tax-free under a documented achievement awards program. An awards program must be open to all and cannot discriminate in favor of higher-compensated workers. The value of each award also cannot exceed a maximum of $400, and typically, the award is presented in a meaningful way through a company presentation.

Many of the tax rules are nebulous and therefore subject to broad interpretation. The important takeaway: if you don’t know, ask.