Spread Corporate Cheer with Care

Before making a statement with expensive company gifts, business owners may want to consider the limits and a few other issues.

When it comes to giving holiday or year-end bonuses to employees, J. Mark Lundy, a CPA with Lundy Allard and Co. in Rogers, said the bonus should be treated like part of the employee’s salary and withholding taxes should be deducted.

David Damron, managing member of Beall Barclay & Co., which also has offices in Rogers, said such bonuses are typically tied to the employee’s performance in some way to reflect the company’s savings generated by the employee.

Many businesses now give employee cash gifts at Christmas that are usually a set nominal amount of $100 or $200, but the cash gifts also have to be treated like wages, Damron said.

“Usually, they’ll gross it up to whatever it takes to come out to that amount,” Damron said, explaining that the employee may get a check for $100, but the company gift was actually more before taxes were taken out.

Gifts such as a turkey, ham or fruit basket are exceptions, and employee taxes don’t have be calculated from the cost.

Businesses can go the extra mile for their employees at the holidays and deduct 100 percent of it.

The cost of the company Christmas party can be deducted as long as it’s only for employees and doesn’t include company clients, Lundy said. Up to 50 percent of the cost of food purchased for clients can be deducted.

“When you feed your employees, that’s 100 percent deductible,” Lundy said. “And that’s kind of one of those neat deals that I think people appreciate.”

It may not be viewed as a gift, but businesses can also treat their employees to some extra training that can be deducted, Lundy said.

“Employee education is something that at the end of the year would be deductible,” Lundy said.

Other gifts can wind up costing more than the employer planned. An Iowa company gave several hogs to two of its corporate officers, claiming the gesture was to motivate employees.

A U.S. District Court found the gifts were actually disguised wages and the company was liable for the appropriate employment taxes. The court noted the hogs were “market ready” and “could almost immediately be converted into cash.”

Corporate gifts are a great way to impress clients and promote a business during the holidays, but Lundy said there are limits to how much can be deducted for the expense. The most that can be deducted is $25 a year for gifts to any one individual. You can also deduct some additional costs, such as engraving, wrapping and mailing the gifts.

Lundy warns that the custom engraving shouldn’t include the company name or logo. That’s considered advertising by the Internal Revenue Service and can’t be deducted as a company gift but has to written off as an expense.

Charitable contributions to nonprofit and not-for-profit organizations are also deductible to a limit. C Corporations can deduct up to 10 percent of their income for charitable giving. “S” Corporations, limited liability companies and partnerships can deduct as much as 50 percent of charitable giving for certain types of charities, Lundy said.

Lundy also warns that the Internal Revenue Service is strict in its requirement that contributions totaling more than $250 to any organization have to be documented.

“Your canceled check won’t do it anymore,” Lundy said. “Charities are pretty good about providing that.”

Lundy and Damron both recommend consulting an accountant before giving out big bonuses or making a statement with expensive gifts to the company clientele.