IRS rules on employee gifts are complicated for both the company and employee. Tax reporting and deduction rules are affected by the gift's cost and whether it is tangible or intangible. The rules apply to both direct and indirect gifts, or those enjoyed not only by the employee but also family members. For the most part, employees have no tax liability for non-cash gifts and small cash gifts.
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"Intangible" Cash Gifts
Cash gifts are viewed by the IRS as intangible. Businesses can deduct a maximum of £16 for each cash gift given to an employee. If the gift is more than £16, the IRS views this as taxable income and the amount is to be included on the employee's W-2 form. The IRS also views gift cards and gift tokens as cash and applies the same rules.
"Tangible" Presents and Gifts
Employees who receive a "tangible" gift, such as a holiday ham, turkey or wine, do not have to report these items on their taxes. Like cash gifts, the company can deduct up to a maximum of £16 of the cost of the gift. The IRS also views these items as "indirect" gifts because they can be used or enjoyed by other people in addition to the employee.
Gifts of Tickets to Entertainment Events
Entertainment tickets, also considered intangible gifts, have separate IRS regulations. For example, if a company gives a gift of tickets to the theatre, a concert or sporting event, the employee has no tax liability. In terms of tax reporting, the employer can choose to treat the expense as a gift expense or an entertainment expense, if the employer does not accompany the employee to the event. If the employer attends the event, the cost of the ticket is an entertainment expense, subject to different IRS rules.
The IRS allows a business deduction for "tangible" award items, such as plaques and trophies. Companies cannot deduct expenses for cash awards, gift tokens or gift cards. The IRS allows employers to deduct up to £1,040 for awards given to a single employee, and the average cost of awards given throughout the organisation cannot exceed £260. For example, if one employee wins eight awards at a cost of £260 a piece, the cost to the company would be £2,080. The company can deduct only £1,040.
Employers can deduct what the IRS rules as "incidental" costs beyond the £16 cash limit on gifts. An example would be engraving a plaque or packaging and mailing a gift to an employee. The expense cannot add substantial value to the actual tangible gift. For example, if an employer buys a £9 basket to give a gift of fruits that cost only £3, the IRS would not view the cost of the basket as an incidental cost. The basket would have to cost less than £3 (the cost of the fruit) to qualify as an incidental cost and deductible expense.
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