Deck the halls with bells of holly, the end of the year is fast approaching. Smells of cinnamon and pine trees will soon take over the air while holiday parties will soon take over your calendar. With all of the hustle and bustle, no one wants to read about account tips, but we’ve got some real treats here that can save you a bundle as you’re throwing parties for employees and giving gifts to business associates. You don’t want to miss these holiday accounting tips.
One of the best things you can do for company morale is throwing a holiday party. Parties thrown for employee and their families are 100 percent deductible. But here’s a tip, keep the expenses reasonable; extravagant expenditures are red flags for the IRS.
Also, refrain from the temptation of doting solely or disproportionately to high-level employees. Doing so could cause some serious HR violations that could not only hinder your wallet but your reputation as well. Instead involved everyone from the busboy and the custodian to the top salesman and the Vice President.
Many business owners invite clients, potential clients, business associates, and other business owners to their holiday parties. If you choose to do so you can write off some of these expenses, but the write-off rules change a bit. You can deduct only 50 percent of the expenditures. And there is a caveat: you must have a substantial business discussion at some point during the party.
One of the greatest parts about the holidays is gift giving. For many businesses, this is a time of year to thank the vendors, suppliers, and customers that keep the business rolling. But, there is an antiquated law that restricts companies from gifting more than $25 per person per year, which can put a damper on the holiday spirit. Here are some ways around that little roadblock.
Gifts to a business entity vs. an individual. The $25 limit only applies to gifts directly or indirectly given to an individual. So, if you have the option, give a gift to the company as a whole as opposed to giving it directly to an individual. This way you can write off 100 percent of the gift value.
Gifts to a husband and wife. If you are giving a joint gift to a husband and wife you can increase the write-off limit to $50 total.
Only direct costs are limited. The incidental costs of making a gift aren’t subject to the limit. For example, you buy a piece of jewelry or plaque that you want to have engraved and then shipped. The costs of engraving and shipping are 100 percent deductible while the cost of the actual gift, the jewelry or plaque, are limited to the $25 rule.
Gifts vs. entertainment expenses. Like gifts to business associates, entertain expenses are only 50 percent deductible. However, if you are giving a gift that could be considered entertainment, for example, tickets to a sporting event or play, then you can deduct half of the cost instead of the limited $25. To put it another way, if you buy your top client tickets to a basketball game to the tune of $250 you can deduct $125 if classified under entertain expense as opposed to writing off $25 when classifying it as a gift. Therefore claiming them as an entertainment expense is more beneficial.
Whether you’re deducting a party, a gift, or an entertainment expense it is important that you document it properly (even for those measly $25 gifts). Be sure to retain the following: (1) the gift’s cost and a description of it, (2) the date it was acquired, (3) the business purpose of the gift, and (4) the business relationship to the taxpayer of the person receiving the gift.
