Of Gifts and Taxes
Ah, Christmas! The time of Peace on Earth, and Gifts for All! Even though the Grinch reminded us that “Maybe Christmas...doesn't come from a store. Maybe Christmas, perhaps, means a little bit more” we still find ourselves giving – and getting – many gifts during the Christmas season. Let’s look at some common gifting scenarios and see if any tax issues lurk beneath the wrapping paper.
"What I don't like about office Christmas parties is looking for a job the next day." Phyllis Diller
While the Tax Cuts and Jobs Act brought about changes to the Meals and Entertainment deductions for businesses, it did not alter the treatment of office parties. Holiday parties remain deductible as an expense to the business and are considered a non-taxable fringe benefit to employees.
However, to qualify for this tax treatment, office celebrations must follow three rules: 1) All employees must be invited. You cannot invite just upper management and treat it as a deductible expense. 2) The party cannot be, in the words of the IRS, “lavish or extravagant.” Of course, the IRS does not define exactly what qualifies as a lavish party; certainly a large law firm in New York city can justify a bigger outlay than a small accounting office in Greenville. It’s best to err on the side of being conservative here. 3) Non-employees, such as clients, vendors, and independent contractors, should not be invited, although employee spouses and family members are okay. Including non-employees makes the event cross over into the Meals and Entertainment category that, if deductible at all, is limited to 50% of the expense.
“A poor excuse for picking a man’s pocket every December twenty-fifth! … But I suppose you must have the whole day off!” Ebenezer Scrooge, in A Christmas Carol
If your employer is better than Scrooge and actually gives you a gift for Christmas, it may or may not be taxable. Most employee gifts will be deductible as an expense to the business whether or not they are taxable to the employee. Under the tax law, almost everything you receive from your employer is considered compensation and is subject to being taxed. If this were not the case, employers would be tempted to call wages “gifts” in order to avoid payroll taxes.
However, the IRS recognizes that some gifts are so small and inexpensive that it’s impractical to do the necessary bookkeeping to report them as taxable compensation. These “de minimis” gifts might include such things as company-branded items, fruit baskets, turkeys and hams, etc. Please note that cash and cash equivalents (such as gift cards) are always considered to be taxable compensation. Likewise, Christmas bonuses are always taxable, with federal, state, and FICA taxes being due on the full amount.
“For it is in giving the we receive.” St. Francis of Assisi
Perhaps you’re receiving a large Christmas bonus and want to give some of it to friends and family. Do you need to worry about gift tax? This is an area of the tax law that confuses many people. The reality is, gift tax rarely becomes an issue for most of us because of the dollar amounts involved.
Gifts are tax-free to the recipient; it’s the giver who may be subject to gift tax regulations. Currently, you can give up to $15,000 per person per year without having any gift tax considerations. Once you give more than that (for example, gifting a relative with a new car, or giving money to a grandchild to cover their college tuition), you must file a gift tax return. This simply reports the amount over the $15,000 threshold that you gave; you still don’t owe any taxes. Each taxpayer has a lifetime total gift limit of $11.2 million. The gift tax return tracks how much of that amount you’ve given; only when you give more than $11.2 million will you be subject to actual taxes. We trust that those with this level of assets are already receiving professional tax advice!
Of course, we all hope to be on Santa’s “nice” list so we can get gifts from the Jolly Old Elf. May we never be too grown up to search the skies on Christmas Eve! We at Down South Accounting and Tax wish everyone a happy holiday season!