Giving is a sign of gratitude and appreciation. It’s a common saying that “giving is better than receiving”.
The giver has the benefit of feeling good about blessing someone else, and the recipient has both the benefit of feeling good that giver cares, and also that of the actual gift. Additionally, the recipient may be more helpful to the giver in the future as a result.
It’s a win-win, right? What could go wrong?
Turns out, there’s quite a few landmines and considerations that should be made, especially if you are empowering your team to distribute gifts on behalf of your company.
While we believe the information within is accurate, this is not intended to be specific legal, tax, or accounting advice, or an all-inclusive discussion of issues to consider. We think it’s simply a good starting place to have a further discussion with your attorney and/or your accountant about your specific circumstances.
The high level considerations that come to mind:
What is the company’s policy on gift giving?
Who are the gifts being given to?
What types are gifts are being made?
How are those transactions being recorded?
Who is monitoring the compliance to the company’s policy of gift giving?
A properly written policy that describes the nature and type of acceptable gifts, payments, travel and entertainment, as well as who is authorized to give on behalf of the company, an approval process, and the procedures for recording/reporting is vital. Employees should acknowledge by their signature.
WHO ARE THE GIFTS BEING GIVEN TO?
The legality of giving gifts and any regulations surrounding it should be the primary consideration. The act of giving someone a gift, such as to a government employee (gov’t contractor or someone regulated by the gov’t), may require certain reporting or have limitations depending on gift type type, value, and other factors. It may be illegal to give, and possibly could be considered a bribe to secure favorable treatment, which is a crime.
While possibility not a matter of legality, some organizations’ policies (both public and private ones) may prohibit their employees from receiving certain types of gifts or gifts all-together. Receiving one may be cause for the recipient to loose their job or to be disciplined.
The rules for tax compliance by the giver vary depending on if the recipient of the gift is a customer, vendor, or an employee.
WHAT TYPES OF GIFTS ARE BEING MADE?
Different types of gifts have different tax-deductability and reporting requirements. We relied on 2017 IRS Publication 463 for this next information.
Some gifts are considered an entertainment expense and are subject to those limitations. For tax year 2018, entertainment expenses are not tax-deductible.
Any item that might be considered either a gift or entertainment generally will be considered entertainment. However, if you give a customer packaged food or beverages you intend the customer to use at a later date, treat it as a gift. A meal that is purchased for the customer when the payer is not present is not considered a tax-deductable meals expense, but may be considered a gift or entertainment depending on the circumstances.
Gifts that are not considered an entertainment expense, the tax-deductability is limited to $25 per recipient during the giver’s tax year as a Gift expense deduction. There are specific guidelines about who’s considered a recipient. There are also a few exceptions to note.
The first exception is that incidental expenses such as engraving, packaging, insuring, and mailing are generally not included in determining the cost of a gift for purposes of the $25 limit.
The second exception is an item that costs $4 or less and has your name clearly and permanently imprinted on the gift, and is one of a number of identical items that you widely distribute. Any signs, display racks, or other promotional material to be used on the business premieres is also not considered.
Gifts to employees have additional considerations. We relied upon 2018 IRS Publication 15-B for these considerations. There are lots of rules here. But the main theme is: Any fringe benefit you provide is taxable and must be included in the recipient’s pay unless the law specifically excludes it.
There are a number of exclusion rules that exclude all or part of the value of certain benefit from recipient’s pay. Cash, cash equivalents, gift cards, gift certificates, and the like are generally are not excluded and must be included in the recipient’s pay.
The exclusions from pay that are closely related to our topic of gifts:
- Holiday or birthday gifts, other than cash, with a low fair market value. Also, flowers or fruit or similar items provided to employees under special circumstances (for example, on account of illness, a family crisis, or outstanding performance).
- Certain meals provided to an employee if it has so little value (taking into account how frequently you provide meals to your employees) that accounting for it would be unreasonable or administratively impracticable.
- Occasional parties or picnics for employees and their guests
HOW ARE THE TRANSACTIONS BEING RECORDED?
It’s very important that a set of systems, processes, and procedures be thoughtfully created so that the giver records all of the relevant information about the gifts given and provides that to the person responsible for compliance, accounting, and oversight purposes.
SOME PRACTICES BASED ON RECOMMENDATIONS BY DELOITTE:
From accounting Today article dated 11/25/15 entitled: “Ground Rules for Corporate Gift Giving to Avoid Breaking the Law“
Set ground rules clearly in a written policy
Act globally for consistency and compliance.
Keep gifts corporate: company branded items.
Make giving inclusive by giving gifts publicly and transparently.
Prohibit cash gifts as well as gift cards. Consider baked goods for teams to share.