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Parties, gifts often qualify for tax deductions
An annual employee holiday function may be 100% tax deductible.
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The season for gift-giving and holiday parties will soon be upon us. Although many optometrists and optometry practice managers clearly know how to celebrate and show their appreciation to both employees and patients, few are aware that Uncle Sam, in the form of our tax laws, is more than happy to pick up part of the cost of the serious business of fun and frivolity.
While parties, business gifts and employee awards do qualify as tax deductible, the act of throwing parties and giving gifts, bonuses or awards to employees, colleagues or patients often has significant tax implications for both the optometry practice and the recipients.
Year-round gifting
Many optometry practices give gifts to referring colleagues and patients, particularly around the holidays. What is often overlooked is that only a portion of the cost of many of those gifts may be deducted as a business expense.
Basically, the Internal Revenue Service will permit an optometry practice to deduct only $25 or less for business gifts given to any one person during the tax year. Any amount in excess of $25 is disallowed as an expense deduction. Thus, if a colleague is given a $50 watch as a gift for his or her referrals, only $25 may be deducted.
The $25 limit for business gifts does not include incidental costs: for example, packaging, insurance and mailing costs or the cost of engraving jewelry. Related costs are considered incidental only if they do not add some kind of substantial value to a gift.
Mark E. Battersby
If key chains or pens with the name of the practice on them are given, they are usually “exceptions” to the $25 limits for business gifts, and their cost is deductible without limitation. Also excepted are items that cost $4 or less, have the practice’s name clearly and permanently imprinted on them and are one of a number of identical items widely distributed.
Entertaining gifts
It is not a secret that optometric professionals are allowed to claim a deduction for only 50% of the cost of business meal entertainment expenses. In fact, in order to be even 50% deductible, those meal and entertainment expenses need to be “ordinary and necessary” as well as closely related to the practice. Unfortunately, even if the expenses are considered related to the optometry practice, the sky is not the limit. No practice can deduct meal and entertainment expenses that are lavish or extravagant. The expenses must be reasonable considering the facts and circumstances.
Holiday parties
Holiday parties, annual picnics or summer outings may qualify for a unique 100% tax deduction. Even employee meetings can be turned into a party for a tax deduction.
Under our tax rules, entertainment expenses must be “primarily” for the benefit of employees other than those in a so-called “tainted group.” The tainted group consists of any employee paid more than $110,000 a year, a 10% principal or any family member of a 10% principal.
While the principal of a closely held optometry practice belongs in the tainted group, it is often not a big deal so long as the partying with the employees is primarily (more than 50%) for the benefit of the employees. Going one step further, the cost of entertaining employee’s spouses is also 100% deductible.
Naturally, the optometry practice must satisfy the “ordinary and necessary” business purpose test. An ordinary and necessary expense simply means an expense that is “appropriate and helpful” to the optometry practice. Boosting the morale of workers and helping everyone feel appreciated makes that holiday party 100% deductible.
Of course, just as any entertainment must be documented, the 100% deductible employee entertainment expenses must be substantiated.
Also remember that in addition to receipts and canceled checks, it is important to write down the “who, what, when, where and why’s.” Like all tax deductions, the write-off cannot be nailed down without writing it down.
Employee business gifts
Bonuses to employees are usually considered income, and while obviously tax deductible by the optometry practice, they are taxable to the employee. Income taxes and FICA taxes on employee bonuses must be withheld, unless the employee is over the Social Security maximum for the year.
It is a slightly different story when it comes to employee awards. In general, up to $400 of the cost for employee awards of tangible personal property (such as a watch) for each employee each year can be deducted. This includes service awards and safety awards. Unfortunately, there are limits on employee awards given by partnerships.
Service and safety awards are not taxable to employees if they are limited: service awards may not be given during the first 5 years and not more often than every 5 years; safety awards may not be given to more than 10% of employees. Awards in excess of the limits are taxable to the recipient.
Gift cards and certificates
Gift certificates and the newer gift cards are, for the most part, taxable to employees because they can be converted to cash. While there has been no official guidance regarding small amount gift cards/certificates ($25 or less), they often qualify as “de minimis” fringe benefits.
However, in general, if gift cards or gift certificates are given, taxes must be withheld from the employee’s pay.
‘Grossing up’ bonuses
Every optometric professional and optometry practice manager considering appropriate employee holiday gifts should keep in mind not only what employees will enjoy but also how taxes will come into play. Because a “gift” is often considered by the IRS to be compensation, it is important to note the rules so employees are not responsible for paying taxes on their gifts.
While some employees will want to change their withholding so as to receive more of the bonus, in many cases, employers will “gross up” a bonus. That is, give the employee more to allow for withholding.
For example, if an employee is given a $1,000 bonus, by the time taxes are taken out, the bonus check might be only, say, $750. Giving a higher amount for the bonus can result in a bonus check that shows the full $1,000.
Tax-free employee gifts
Among the options to ensure employees will not face a tax on their holiday gifts is giving smaller gifts. As mentioned, whether for patients or employees, gifts less than $25 are tax-exempt. If this is the amount typically spent on each employee gift, then there is nothing to worry about.
Taxes are also a nonfactor if the holiday gift is a reward for service (i.e., highest sales) or longevity (i.e., the employee has been with the company for 10 years). Also, if the gift to employees is a charitable contribution in their name, there is no worry about taxes, no matter the amount.
If the practice or business is such that employees would enjoy its products (such as designer sunglasses in an optometry practice), giving products or services as gifts can mean not having to pay taxes on them. With an employee who might not get too excited over the practice’s products, this might be a good opportunity to get creative.
It should be kept in mind, however, that merchandise given to either patients or employees may be subject to sales tax even though they are not for resale. It is the rule in many states.
An optometric professional taking a group of employees, or even fellow professionals who might be the source of referrals, to an event, means the cost will usually be tax-free. Remember, the rules say that the group cannot consist only of family members involved with the practice if is a tax-free business expense.
Tax-free and tax-deductible
As the holiday season fast approaches, every optometrist and practice manager should keep in mind the role that taxes play. Those optometry professionals considering a “small gift” for practice employees – fruit baskets, hams, turkeys, wine, flowers and occasional show or sporting event tickets – will find they are generally nontaxable de minimis fringes and tax deductible by the practice.
The cost of occasional parties is nontaxable to employees and their families as a de minimis fringe – if they are infrequent and for the purpose of promoting employee health, good will, contentment or efficiency. Thus, occasional holiday celebrations, cocktail parties and picnics are fully tax deductible by the optometry practice and they are not subject to the 50% limit on business meals. It is, however, always a good idea to consult a tax advisor.