Whether personal or business-related, the holidays are a popular time to give and receive financial gifts. It’s important to keep the tax rules in mind since they can affect both giver and recipient. We have some information to help you navigate the naughty and nice list for cash and investment gifts (and remember to visit irs.gov for the most current information).
As defined by the IRS, gifts include cash or property given to another person or organization without the donor receiving compensation equal in value to the gift.
Giving someone the use of property or income from a property may also be considered a gift—as can a loan to someone else with little or no interest required.
According to the IRS, “the general rule is that any gift is a taxable gift.” However, there are exceptions to this rule, such as:
Gifts that are less than the current annual exclusion ($15,000 per gift to each individual in 2021).
Money or property given to a spouse.
College tuition paid directly to a school on behalf of another person.
Medical expenses paid directly to a medical facility for someone’s care.
Gifts to a political organization.
Charitable contributions.
For small business owners, these gifts can be important for building rapport, but they also come with possible tax implications. For example, if a gift is considered taxable income to the employee, you’re required to withhold all applicable federal and state income and payroll taxes. You must also pay other employment taxes, such as federal and state unemployment tax, on these amounts.
Gifts of property are not considered taxable income to employees as long as they fall under the definition of a “de minimis fringe benefit.” The IRS considers a de minimis fringe benefit to be a gift “for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable and impractical.”
This might include the occasional snacks, coffee and doughnuts, or holiday and birthday gifts with a low fair market value, such as flowers, fruit, books, etc.
The IRS does not specify a maximum dollar amount for excluding de minimis fringe benefits from an employee’s taxable income; however, a business cannot deduct more than $25 of a gift to any one person each year, including employees. So even if you purchase a $100 ticket to a sporting event for your client, only $25 can be deducted.
However, even though gift cards and gift certificates are considered taxable income to employees because they can essentially be used like cash, you can deduct the full cost of the gift card—but you must withhold taxes from an employee’s pay for it.
As far as reporting, the IRS states: “If the benefits qualify for exclusion, no reporting is necessary. If they are taxable, they should be included in wages on Form W-2 and subject to income tax withholding. If the employees are covered for Social Security and Medicare, the value of the benefits are also subject to withholding for these taxes. You may optionally report any information in box 14 of Form W-2.”
The IRS has specific rules on awards you might give your team for safety or service, too, so be sure to check irs.gov for the latest rulings on these popular recognition programs. Also, keep in mind that The Tax Cuts and Jobs Act of 2017 stated that “Awards of tangible personal property cannot include cash, cash equivalents or gift cards, vacation, meals, lodging, theater tickets, sports tickets, stocks, bonds, or similar investments.”
Make it a habit to record all gifts to employees in detail—and keep all receipts in order to deduct them and in case the IRS questions their validity.
Charitable contributions made to a qualified, tax-exempt organization are deductible if you file an itemized tax return. (You’ll need to determine if this is more advantageous than taking the standard deduction. Also, there is a limited deduction available to individuals who don’t itemize; check with your tax professional for details.) For any donation larger than $250, you must provide records of the gifts in the form of receipts or canceled checks. Cash contributions can be deducted up to 50 percent of your adjusted gross income (AGI), property gifts up to 30 percent and capital gains assets up to 20 percent of your AGI.
A small gift of appreciation can leave a lasting impression on its recipient and serve as a valuable tax deduction. The important thing is to make sure you record all the gifts you give, keep the receipts and comply with the annual IRS gift limit amounts. And always be sure to check with our team if you’re unsure about the tax implications of your generosity.