Can I fully deduct the cost of gifts to employees?

Question:

To promote employee goodwill, my partners and I would like to give out turkeys and hams this holiday season. We also want to give the employees $100 apiece. Can the partnership deduct the cost of the items given, even though the merchandise is not wages or salaries? Are the gifts subject to withholding?

Answer:

You can deduct the cost of turkeys, hams, or other tangible gifts you give to employees as long as the value does not exceed $25 per year per employee. They qualify as business expenses, and the gifts are not taxable to the employees or subject to withholding.

Cash -- or cash equivalents, such as gift certificates -- are looked at differently through the tax authorities' eyes, however. You must treat such gifts as additional compensation, no matter what the amount. These gifts are subject to withholding.

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