December 2nd, 2010 by: Roni Lynn Deutch
Show appreciation for clients, customers and employees — and get a tax deduction, too.
The holidays are here, and for many people this is a season of gifts and parties. For entrepreneurs, this is the time of year when business protocol dictates sending gifts to clients, hosting dinners with potential clients and throwing holiday parties for employees. Lucky for business owners, many of these expenses are tax-deductible. Here’s what you need to know:
Who doesn’t love a party? Holiday office parties are a fantastic way to show your employees you appreciate them. Showing appreciation for the people you work with every day is especially crucial during challenging economic times. And with holiday bonus checks shrinking every year, a holiday party is a nice alternative. Let me get to the best part: The cost of throwing parties for your employees is 100 percent deductible. The food, the beverages, the decorations — all those expenses can be deducted. The only caveats: The expenses must not be overly extravagant (e.g., champagne, caviar and lobster for a holiday luncheon), and the parties must be infrequent (weekly parties are likely to raise an eyebrow or two at the IRS and could invite an audit).
Another common business practice is hosting holiday events for clients. Some choose to throw one big party; others opt to take individual clients out for a meal. Either way, when you entertain clients and potential clients, the tax benefit is the same: You may deduct 50 percent of the cost. The requirements here are that the expenses not be extravagant, and business must be discussed or conducted either during or adjacent to the meal (e.g., going out to dinner after a meeting).
Many business owners reward their employees with small gifts, tokens of appreciation at the holidays. These can be part of a holiday party or a stand-alone gift. The key here is to keep the value of these gifts in a reasonable range or, as the IRS says, “of nominal value.” Doing so allows you to give these gifts and claim deductions for nonwage work business expenses. Even better, these “de minimis” gifts are not subject to the standard 50 percent deduction limit that usually applies to meal and entertainment expenses.
In addition to gifting employees, many business owners will send gifts to clients and customers to promote good will and as a thank-you for their continuing business. This smart business practice can go a long way toward maintaining happy customers and keeping your business at the top of people’s minds. Now for the tax component: You can deduct up to $25 worth of gifts for each customer, each year. While that may not sound like much, remember that client gifts need not be extravagant to make an impact. If you simply must spend more on each customer, you certainly can; you just cannot deduct the full cost.
As an alternative, consider buying your customers tickets to an event, like a basketball game, or for a night at the theater. This gives you a choice: You can deduct up to $25 per gift, or claim it as an entertainment expense and deduct 50 percent of the cost of the tickets. Just make sure you document what you are giving to each client, the amount spent and how you want to claim it.
The holidays are a great time to show appreciation to those you work closely with all year long. And claiming the tax benefits that go along with gifts of appreciation is not too shabby, either. Here’s wishing you a happy holiday season and looking forward to the New Year.