The general rule of thumb is that any gift is a taxable gift. However, there are many exceptions to this rule. The following gifts are generally tax-free. Gifts that qualify for minimum additional benefit status include holiday gifts, occasional tickets to entertainment events, and occasional refreshments or beverages given to employees.
While individuals would enjoy a tax-deductible charitable contribution for the donation and employees would prefer that the donation not be taxable for them, this type of “double dive” is generally not the result. To constitute a gift for the purposes of federal tax law, a transfer of money or property must be made out of a sense of selfless generosity. If you give a gift to a member of a customer's family, the gift is generally considered an indirect gift to the customer. Gifts can be given to employees for vacations and career achievements, or they can be given to customers and suppliers in appreciation of their continued support.
Gift cards and gift certificates are considered taxable income for employees because, essentially, they can be used as cash. A gift to a business that is intended for the eventual personal use or benefit of a particular person or a limited class of persons shall be considered an indirect gift to that particular person or persons within that class of persons receiving the gift. When it comes to holiday gifts and prizes between those ranges, employers should use their judgment to decide whether the gift or prize is excludable from employee income as a de minimis add-on benefit. Examples include parents of private school students giving end-of-year gifts to their children's teachers, or a hospital patient's desire to give financial thanks to the medical team that provided excellent patient care.
Section 102 (c), however, provides that the gift exclusion does not apply to “any amount transferred by or for an employer to, or for the benefit of, an employee. Making a gift or leaving your estate to your heirs usually doesn't affect your federal income tax. A possible exception can be found in the informal IRS guidance, described below, according to which gift certificates would be considered property because they specifically convey the right to receive a ham. In any case, it's important for small businesses to know how to manage the reporting of corporate donations to the Internal Revenue Service when tax time comes.
This method should be reserved for taxpayers who have no record of the tax years in which a gift tax return was filed.