The season for gift-giving and holiday parties will soon be upon us. Although many MSOs clearly know how to celebrate and show their appreciation, few are aware that Uncle Sam, in the form of our tax laws, is more than happy to pick up part of the cost.
While parties, business gifts and employee awards often qualify as tax deductible, giving gifts, bonuses or awards to employees, clients or customers can have significant tax implications for both MSOs and the recipients. Bottom line, however, is that everyone will be excited to know that their annual employee holiday party may be 100 percent tax deductible.
MSOs may give gifts to clients and customers, particularly around the holidays. What is often overlooked is that only a portion of the cost of certain gifts may be deducted as a business expense.
The IRS will let a collision repair business deduct only $25 or less for business gifts given to any one person during the tax year. This means that any number of employees, co-owners or business partners may give a client business gifts, although the deduction will be limited to $25 per recipient. Any amount of expense in excess of $25 is disallowed as a deduction. So, if a client is given a $50 watch as a gift, only $25 may be deducted.
The $25 limit for business gifts doesn't include incidental costs — for example, packaging, insurance and mailing costs, or the cost of engraving jewelry. Related costs are considered incidental only if they don't add some kind of substantial value to a gift.
If key chains or pens with the name of the business on them are given to customers and clients, 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 business’s name clearly and permanently imprinted on them, and are one of a number of identical items widely distributed. Signs, display racks or other promotional material to be used on the business premises of the recipient are also ignored for purposes of the $25 limit.