When tax season rolls around, are you scouring your books to make sure you’re collecting every deduction that you’re due? Some 30% of small businesses today believe they overpay on their taxes because they miss out on valuable deductions.
Gifts to employees are a recurring expense for most business owners. Expenses throughout the year, such as branded drinkware or apparel for new employees, holiday gifts, and raffle prizes can easily be forgotten or go unnoticed when it’s time to file.
With all of that in mind, the question stands: Are employee gifts tax-deductible?
Like with many questions related to tax deductions, the answer is yes but with some caveats. At Myron, we offer an expansive catalog of employee gifts for any occasion. Keeping track of these throughout the year will prep you for next season. Read on to learn more about the rules, exceptions, and which gifts qualify to be tax-deductible.
It starts with a restriction on the amount you can deduct. The Internal Revenue Service (IRS) allows you to deduct employee gifts up to $25 per gift recipient. This limit applies for the duration of the tax year. Note that the $25 cap applies to business gifts that you have given both indirectly and directly. For example, if you and your spouse gave gifts to the same person, you are both treated as a single taxpayer.
Gifts that fall under this umbrella must be tangible items and don’t include activities or gestures such as taking an employee out for coffee or lunch. Eligible gift items must be separate from the employee’s gross income. Cash or gift cards are not considered eligible items.
Now that you understand the general rules, what do you need in order to record the deductions?
The IRS requires you to keep documentation of any gift to receive the deduction. Keep the receipts as they accumulate throughout the year, as you will need to show a record of the amounts spent on gifts. Also make sure to note the business purpose the gift serves — when it comes to tax deductions, the IRS wants to know that this expense was value-driven.
So, what are the caveats?
The IRS allows wiggle room above the $25 limit for things like packaging and engraving, given that they provide value to the gift. If you purchase your employee an engraved plaque, for example, you can deduct the $25 for the plaque, and up to $100 on the engraving service.
The engraving service is considered an incidental expense, as are things like packaging, wrapping, and shipping costs.
Gift Ideas You Can Deduct
Since you receive a tax credit for your employee gift, use some discernment to ensure that you get your money’s worth. Having a game plan for the gifts you select will not only ensure that you are choosing thoughtful gifts, but also will give you the chance to record the unique purpose of each gift ahead of time.
As an example, pens and notepads are excellent gifts for new employee onboarding. On average, new employees complete 54 tasks during their onboarding processes. Having a company-branded pen and notepad is a highly practical and useful way of saying “Welcome to the team.”
Here are some practical pens and pads you can explore as valuable business gift solutions for your employees and record in advance of tax season:
Pens and pads aside, think outside the box when gifting your employees. You can find an array of impactful gifts for any of your employees while easily staying within the $25 limit.
Here are some other gift options to consider:
- A new coffee mug for employees to enjoy coffee daily or specialty beverages like hot chocolate when the weather gets colder
- A laptop bag that lets them travel efficiently and attend meetings in style
- A master planning calendar to celebrate a new promotion
- New sunglasses to get ready for team outings in the sunshine
- Durable plastic water bottles to stay hydrated throughout the day
Shop for the Best Tax-deductible Gifts
The employee gift tax deduction has been around since 1962, yet it’s a credit that many business owners don’t know about. With a bit of organization and attention to detail, you can take advantage of the business gifts you distribute throughout the year and ensure you get what you are owed when tax season comes around.
Need more tax-deductible gift ideas? Check out some of our best sellers to get started.