We all wish that the magic of the holiday season included an escape from all things tax-related. However, there are several common business situations related to the holidays that may have tax implications for you when you file your 2012 return in 2013. Many businesses give gifts to their clients, particularly at Christmas time. Depending on the number of clients and the average amount spent by each client, the amount of the gift can range from $10 to $100s of dollars. You decide what is appropriate for your clients but the IRS decides what is tax deductible. For each client, each year, you may deduct up to $25 for tax deductible gift expense. So be aware as you are cruising the aisles of your tack store that you will get no tax benefit for anything that you spend on each client over $25.
One thing that you can do to mitigate this situation is to give your clients something wearable, like a baseball cap or a polar fleece and have your business name embroidered on the gift. In this case, the gifts would qualify as advertising, which is fully tax deductible. If you are ever audited, the IRS will look at the practical application of this item as advertising so for the average business, your business name on a picture frame, Christmas stocking or similar item would not qualify as advertising and you’d be back to the $25 limit.
Your business may also give gifts to your employees. The limit for employees is similar. For any gift valued at $25 or less, the IRS treats that as de minimis – not considered compensation and not subject to payroll taxes. However, if you give your employees $25 or less of cash or a cash equivalent such as a gift certificate, the entire amount IS considered compensation and subject to payroll taxes. So no tax ramifications for a $24 turkey but a gift certificate for a $24 turkey is subject to payroll taxes. (Yes I know some of these rules are just plain foolish!)
What about Christmas parties – both for employees and/or clients? Some businesses spend a lot of money each year, thanking those responsible for its continued success over the past year. Business expenses are only deductible at 50% for tax purposes. So if you spend $1000 for your annual Christmas party, you will only be able to deduct $500 on your tax return – whether it’s for employees or clients or a mixture of both. The only instance when meals and entertainment is deductible at 100% is when they are provided to employees for the convenience of the employer. For example, your employees generally have an hour for lunch and leave the property to head for the nearest fast food location. But you are holding a clinic with a big name clinician and are expecting a lot of auditors and the participants are going to need some extra barn help available. So you order in for your employees, so they will be available during the lunch hour.
Meals and entertainment is one of the IRS red flag areas for audits so be sure to keep all receipts and document thoroughly the details of the expense – who came, what was served, etc. You don’t want your wonderful memories of your holiday party to be tarnished by the experience of an IRS audit later on.