December 2019 Client Profile

Jenny owns a warehousing company and wants to give a holiday party, but she has heard that the cost is either 50% deductible or 100% deductible from business income. Which number is correct, and can she also give cash gifts to employees?

Jenny may have heard two similar IRS rules. The first allows companies to deduct 50% of employee meal costs during the course of normal business. She can deduct 100% of meals provided employees when offering company recreational or social activities, such as holiday parties or annual picnics.

To qualify, the holiday party should be primarily for the benefit of employees other than officers, shareholders or other owners who own a 10% or greater interest of the business. Jenny can also give cash gifts to employees, but she and her employees should be aware that they are considered taxable income. She might include a gift to each employee that is typically worth less than $25, which they don’t have to report as income. Better yet, if Jenny was planning to give a larger cash gift, she might contribute it to employees’ retirement plans, where it would be tax-deferred.

Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.