’Tis the Season

At the end of the year, companies often celebrate the holidays by having office parties or giving gifts to their employees. The following are some general guidelines as to what is taxable and what is not:

Gifts. Employers can give their employees merchandise of nominal value — hams and turkeys, for example — with no negative tax consequences. Such items are de minimis fringe benefits that don’t have to be included in the taxable compensation of the recipients if making a general distribution is seen as a means of promoting goodwill.

Parties. In most situations, the tax law limits a company’s deduction for business meal and entertainment expenses to 50% of the expenses. However, like the holiday gifts just described, an occasional party given for employees and their guests is also considered a de minimis fringe benefit. The 50% deduction limitation does not apply.

Achievement awards. Employers sometimes use a holiday get-together as an occasion to hand out achievement awards to employees in recognition of length of service or safety. Again, the full cost of such awards is deductible — and their value need not be included in the employees’ compensation — if various tax law requirements are met.

In general, the cost of all awards made to one employee during the year may not exceed $400. A higher $1,600 limit applies if the awards are made under a written plan or program that doesn’t discriminate in favor of highly compensated employees as to eligibility or benefits.