Are Holiday Business Gifts, Prizes, or Parties Taxable?

Ah, the holiday season is in full swing and that means it is time for important holiday parties and celebrations. But to avoid a troublesome “bah, humbug” event at tax time it is important to plan the celebration carefully, including the consideration of gift tax rules and implications.

Why Holiday Parties are Important

Even during the COVID-19 pandemic, holiday business parties, gatherings, and celebrations are still important, even if they need to be handled a bit differently than in prior years to provide safety for all participants.

A holiday business celebration is important because:

  • It shows a tangible expression of appreciation for all the team members and provides opportunities for recognition of achievements and contributions.
  • It helps build worker loyalty.
  • It helps build company culture, a culture where all employees feel part of a team; a team focused on the same goals and working within the same standards.
  • It helps improve workplace morale, which in turn improves worker productivity.
  • It allows employees to interact with each other and with executives and upper management to build and improve understanding and connections.

Planning celebrations shouldn’t be treated casually. Rather, plan the event so that it feels genuine, not rushed, not inconsequential, not cheap, and not just “checked off the to-do list.” You want the employees to appreciate and enjoy the event. Assess the company’s year and plan the event accordingly. A tough year’s celebration shouldn’t feel like the most extravagant party in history. Get feedback from employees on what they would like to do or experience. And be inclusive. Gift tax rules are an important consideration but should not drive the event planning.

Are Holiday Business Gifts, Prizes, or Parties Taxable?

The Tax Cuts and Jobs Act of 2017 reduced some business meal deductions and eliminated deductions for business entertainment. However, holiday parties are fully deductible, provided that they are for the benefit of non-highly-compensated employees.

The Internal Revenue Code Section 61 states that all forms of compensation are subject to income tax unless they are specifically excluded by the tax code. Section 132 of the tax code indicates the exclusion of fringe benefits that are “de minimis,” essentially small. These include items generally under $100 in value such as:

  • Traditional gifts that have a low fair market value; not including cash.
  • Occasional theater or sporting event tickets.
  • Flowers, fruit, or books.
  • Holiday ham or turkey.

Employers can set their own limits on what to them is “de minimis,” such as $25 or $50.

The tax code regarding gift tax rules is clear that these items are indeed taxable:

  • Cash or gift cards/gift certificates of any amount.
  • Season tickets to sporting, movie, entertainment, or art events.
  • Membership in a private club or athletic facility.
  • Use of an employer-owned or leased facility such as a hotel room, apartment, hunting lodge, boat, etc.
  • Expensive gifts of things like tablets, large screen TV’s, computers, etc.

It is important for employers to take a conservative view of gifts and stick to the gift tax rules to avoid difficulties with the IRS. It is also important to seek professional accounting advice to guide and protect the company.

Get Expert Accounting and Financial Assistance

Contact Doerhoff & Associates, CPA, based in Jefferson City, MO for professional accounting and financial assistance that you can count on. Doerhoff & Associates has one goal in mind, to provide comprehensive business accounting services designed specifically for your success.