How Deductible is that Holiday Party?
By: Mark Battersby
Although the owners and managers of many feedlot, stocker and cow-calf operations clearly know how to celebrate and show their appreciation to both customers and employees, few are aware that Uncle Sam, in the form of our tax laws, is more than happy to pick up part of the cost. Even fewer are aware that those parties, business gifts and employee awards can have significant tax implications for both the feedlot operation and the recipients.
It is no secret that our tax rules allow feedlot operators to claim a deduction for only 50 percent of business meal entertainment expenses. In fact, even if business meal and entertainment expenses are considered business-related, the sky is not the limit. The expenses must be reasonable considering the facts and circumstances and no deduction can be taken for meal and entertainment expenses that are lavish or extravagant.
While entertainment expenses must be “primarily” for the benefit of employees other than those in a so-called “tainted group,” the tainted group consists of only employees paid more than $110,000 a year, a 10% owner, or a family member of a 10% owner.
Being the owner of a closely-held feedlot, stocker or cow-calf business may mean being part of the tainted group, but it is no big deal so long as partying with 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 percent deductible.
Of course, it is still necessary to satisfy the “ordinary and necessary” business purpose test which means the expense is “appropriate and helpful” to the business. Boosting the moral of workers, helping everyone feel appreciated makes that Christmas party 100% deductible.
Just as any entertainment must be documented, employee entertainment expenses must also be substantiated. In addition to receipts and cancelled checks, it is important to write down the “who, what, when, where and why’s.” Like all tax deductions, the write-off can’t be nailed down without writing it down.
Bonuses to employees are usually considered income and while obviously tax deductible by the feedlot operator, they may also be taxable to the employee. It’s a slightly different story when it comes to employee awards where up to $400 of the cost for employee awards such as a watch for each employee each year can be deducted. This includes service awards and safety awards. There are unfortunately limits on employee awards given by partnerships.
Gift certificates and 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.
Because a “gift” is often considered by the IRS to be compensation, every feedlot operator and manager considering appropriate employee holiday gifts should keep in mind not only what they’ll enjoy but also how taxes will come into play.
A feedlot operator taking a group of employees, such as the management team, to an event, means the cost will usually be tax-free. Remember, the group can’t consist only of family members involved with the business if it is a tax-free business expense.
As the Holiday season fast approaches, every business owner and manager should be aware of the role that taxes play. Those feedlot, stocker and cow-calf operators considering a “small gift” for employees – fruit baskets, hams, turkeys, wine, flowers and occasional entertainment tickets, such as for a show or sporting event, will find they are generally nontaxable de minimis fringe benefits and tax deductible by the business.
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 company picnics are fully tax deductible by the feedlot business and they are not subject to the 50% limit on business meals. It is, however, always a good idea to consult a tax advisor.