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Tax Tip: Holiday Parties + Gifts = Happy Workers, Tax Deduction

Posted: September 26, 2013, 2:35 p.m. EDT


By Mark E. Battersby

Many within the pet retail industry celebrate and show appreciation to employees during the holidays, but few know that Uncle Sam will pick up part of the costs. In other words, those annual employee holiday parties might be 100 percent tax deductible.

Not all gift or party expenses are fully tax deductible by the business or tax free to the recipient.

However, for retailers, manufacturers and distributors considering giving a small gift to employees (fruit baskets, turkeys, wine, flowers and occasional entertainment tickets) generally are nontaxable de minimis (minimal) fringes and are tax deductible by the business.

What is often overlooked is that only a portion of the cost of certain gifts may be deducted as a business expense. Basically, the IRS will let a pet dealer deduct $25 or less for business gifts given to any one person during the tax year.

Keychains or pens sporting the business’ name are usually exceptions to the $25 limit for business gifts; their cost is deductible without limitation. Also excepted are items that cost $4 or less, feature a clear and permanent business name, and are one of a number of identical items widely distributed.

Back to those holiday parties, annual picnics or summer outings that might qualify for a unique 100 percent tax deduction. Our tax rules state that entertainment expenses must be primarily for employees other than those paid more than $110,000 a year, are 10 percent owners or are family members of a 10 percent owner.

The cost of occasional parties is nontaxable to employees and their families as a de minimis fringe if held infrequently and for the purpose of promoting employee health, goodwill or efficiency. Thus, occasional holiday celebrations, cocktail parties and company picnics are fully tax deductible by and are not subject to the 50 percent limit on business meals.

Expenses still must pass the "ordinary and necessary” test, which means an expense that is "appropriate and helpful” to the business. Boosting employee morale and sense of appreciation makes that Christmas party 100 percent deductible.

The 100-percent-deductible employee entertainment expenses must be substantiated. Like all deductions, the tax write-off can’t be nailed down without writing it down.

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