How Much Are Your Gifts Worth?

You can't help but love TAXMAMA, or at least I do, she publishes some dynamic tax information and sometimes I just love to share all her knowledge and humor. The following article deals with how much gift giving you do to your clients or customers and how it's should be claimed on your business returns. Take heed, this is good stuff.....

Watch what you give -- and get

Workplace gifts are great, but are they really free?
By Eva Rosenberg, MarketWatchLast update: 7:19 p.m. EST Dec. 27, 2007

LOS ANGELES (MarketWatch) -- Workplace gift-giving is down this year. According to an annual survey conducted by New York-based executive search firm Battalia Winston, only one-quarter (26%) of respondents say they will provide a holiday gift to employees this year, down from 42% only five years ago. Were you one of the lucky ones?The nature, cost and value of gifts have changed over time. The first holiday gift TaxMama ever got from an employer was back in the heyday of rock and roll. KHJ, the home of Boss Radio, gave each employee a $25 gift certificate to Ralph's Grocery. Back then, for the average employee $25 was about 10% to 20% of a week's wages.

Yet the Internal Revenue Code still limits deductible gifts from businesses to $25 per person, per year. Note the "per year" part of this. Many people seem to think that the limit is $25 per gift. Unfortunately, once you've given your client or associate that $25 gift for their birthday, you can't deduct the next gift you give them later on. In addition to the $25, you can also deduct incidental costs, like engraving, packaging, insuring and mailing. IRS doesn't specify that sales tax is an additional cost. But, surely, it can be added to the cost of the gift, can't it?

Is that $25 rule just for gifts to clients, customers or potential patrons of your business, or is it also for employees? IRS lays out specific rules for achievement awards, length of service awards and safety achievement awards. If the employer has a written plan that spells out the rules for earning a reward, it may give the deserving employee as much as $1,600 per year without adding the award to the employee's wages. Without a written plan, the limit is $400.

Employers sometimes misunderstand these rules and use these limits for gifts, in general. So they give monetary bonuses without addressing the payroll issue. That would be a mistake. According to Carol Alvarez, a senior manager in New York-based accounting firm Mahoney Cohen & Company, IRS requires employers to add the value of bonuses and gifts to the employees' wages.

Those are the rules. But what are companies doing? One employer who, prefers not to be named, is giving her employees cash bonuses of $500 or more. She's not adding the amount to their wages. Mary Dahlberg, an enrolled agent in Truckee, Calif., says her clients include the gifts as wages or issue a Form 1099 for large gifts to customers. However, Dahlberg says many clients prefer to throw a generous holiday party instead of dealing with the gift issue. An accounting firm Encino, Calif., holds its annual holiday party on a cruise ship. They take their annual weekend cruise to Ensenada in Mexico each December.

And that does bring up another issue. At the California Society of Enrolled Agents December meeting last week, someone said one of his clients won a $100 massage in a drawing at a holiday party. Many companies spend hundreds or thousands of dollars on giveaways that are randomly drawn at holiday parties. With all the food and booze, no one's paying attention to account for who won what. Can the employer take deductions for "gifts" given away at parties like this? Doug Thorburn, a Northridge, Calif., enrolled agent, insists that there is a distinct difference between gifts and incentives. Thorburn says that a gift is something you give someone expecting nothing in return, with detached and disinterested generosity. Giving someone something with "the incentive of anticipated benefit" is a pure business expense, not a gift. And it needn't be accounted for as a gift with the $25 limits.

One person added an interesting twist to business gift-giving. A Duluth, Minn., accountant, Stephen P. Arkulary's, favorite gift is Boy Scout popcorn. It helps out the Boy Scouts and is a treat that most people would enjoy. It works as an employee gift or a charitable donation. Or both.
When it comes to deducting charitable contributions, you may not deduct the value of the goods or services you receive. So, suppose you spend $100 each on watches you get from a charity. If the charity gets them wholesale, a $50 watch might cost it only $25. You'd end up with a charitable contribution of $75 for each purchase -- and a business deduction for the $25 value of the goods or services received. Quite clever. What's a great way around all these tax constraints? Dale Winston, CEO of Battalia Winston, tells us her annual survey shows that gift-giving is still alive and well in the workplace around the holidays -- but it is among employees. This year, 41% of businesses say employees are planning on some type of gift giving (i.e. Secret Santa, grab bags, etc.) among one another this year.

Not a bad idea. After all, when it comes to personal gifts, the 2007 IRS limit is $12,000. What's the best gift I ever got? A boss on a job I'd only held for two weeks once asked me what I wanted. I told him, I'd love to get a new car. Come Christmas, I received a holiday-wrapped box of See's Candies, a $100 bill and a shiny, red Datsun 240z. By Tonka, that is.

S. Raines, Sr. Financial Advisor/Tax Preparer