Can I fully deduct the cost of gifts to employees?

Here are the rules to follow for tax deductible gifts.

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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