Can Parties and Gifts Affect Your Taxes?
With the holiday season coming to a close and New Year’s just around the corner, the holiday credit card bills are starting to pile up and you might be wondering about obscure tax deductions. One of the most popular questions that come up during the holiday season and other joyous occasions like birthdays and weddings is, “Can I write this party or gift off my taxes?”
Is There a Clear Business Purpose for the Party?
If writing holiday parties, weddings, and the like off our taxes was that easy, virtually everyone would be doing it. Numerous cases have been tried in Tax Court for people tried to deduct their wedding or a child’s wedding just by inviting several colleagues, and holiday parties
However, if you’re a freelancer or small business owner and that event is meant specifically to market your business, so long as your records show that hosting this party is directly related to your operations, you get a deduction. Are you showing appreciation for your clients and looking to make them appreciated so they’ll give you more business, or perhaps looking to strengthen business relationships with contractors, affiliates, or other freelancers who help you develop your products? Spread that holiday cheer: you’ve got a deduction.
If you’re throwing the party just to get in the spirit but there’s no specific business purpose, you don’t get a deduction just for hosting and using your business credit card to pay for it.
It’s less clear-cut when you’re someone’s employee. That party you’re throwing that the boss didn’t pay you back for? It needs to be attended by people who will improve your employer’s position (and possibly yours if you’re gunning for a promotion.) If you’re a manager paying out of pocket to do something nice for your team members for the holidays so they’ll be motivated and it shows up on your bonus check, you’ll have an easier time claiming this deduction than an employee simply inviting some co-workers to their family’s annual holiday party since the main purpose must be for business. Regardless of what the purpose is though, a majority of employees can only claim these expenses if they itemize deductions.
And no matter what the reason is for having the party or who attends, you might be able to take some additional personal deductions if you’re donating leftover food to food banks or party favors and unwanted gifts to eligible charities.
The Gift of a Tax Write-off
Gifts to charity aside, business gifts are also deductible to a certain extent. You are limited to $25 per recipient per year if you’re buying gifts for clients, associates, and other people you have professional relationships with.
While you’re certainly free to spend more money on gifts or give multiple gifts where the aggregate value exceeds $25 for the year and just absorb it as a cost of doing business, tax-wise you will only benefit from $25 per recipient for the whole year. You may need to spend $100 on a client who frequently drops lucrative contracts on you and only get a $25 deduction, but if you bought four $25 bottles of wine and gave them to four different colleagues you can deduct the full $100.
The exception to this $25 minimum is when you give de minimis gifts that are nominally less than $4 USD in value and often have the sole purpose of promoting your business. This would include small tchotchkes like pens, stress balls, thumb drives, and other branded items.
For employees, you are also subject to the $25 limit per recipient per year and must itemize deductions in most cases for those gifts you got for your boss, co-workers, or Secret Santa program everyone had to participate in.
Of course, keeping the tax authorities at bay shouldn’t stop you from having a holiday party if you’d like throw one or give gifts that immediately remind you of someone you work with. But if you’d like to see a tax benefit, carefully examine why you’re hosting that event, who you’re inviting, and what benefit you hope to achieve as a result.