It seems that holiday parties are making a comeback after a few years of austerity-driven cutbacks. According to a survey from Challenger, Gray & Christmas, Inc., 83% of companies are planning holiday celebrations this year, significantly up from a sad 68% in 2011 – but not as many as the halcyon days of the mid-2000s with as many as nine in ten companies throwing holiday bashes. The increase is fairly consistent with my own, admittedly, less scientific research on twitter.
My firm is having a celebration this year, too. We've done one every year with varying degrees of splash, depending on timing, money and circumstances (like most companies). Our celebration this year doesn't include clients – just the firm – and it’s not a party in the boozy/noshy/dance-y sense. Rather, it’s a dinner at a local restaurant with significant others and kids.
Whether it’s a lavish nightclub affair a la Goldman Sachs in 2007, arriving at a fancy dinner via private plane or a buffet in the company break room, holiday parties have long been a way of saying thank you to employees for their service. In addition to making employees feel valued and keeping them motivated, there are some tangible tax benefits. Giving employees expensive gifts or cash can result in income tax consequences to the employees since those items are reportable by the employees as income. But the IRS allows you to throw a firm or company holiday party – even a fancy one – with no tax consequences to the employees. And unlike other business lunches and dinners, you don’t have to “talk business” at any time in order to make it deductible to the company.
Notwithstanding the outrageous affairs you've heard about on Wall Street, for a bash to be deductible, the IRS requires that it be reasonable. A company may not deduct expenses for entertainment that are “lavish or extravagant.” According to the IRS, an expense is not considered lavish or extravagant if it is reasonable considering the facts and circumstances. Yes, that means that what be reasonable for Google or Yahoo might not be reasonable for your own company; spending for the event should be consistent with the type and level of company or firm.
At our firm, we’ve run the gamut from an in-house pick-up hosted in the conference room with wine and cheese to a fancy-schmancy affair complete with ice sculptures and a vodka bar to a sit down dinner at a local pub. Each year, we try to think about venue, cost and timing – as well as what works for our employees. For instance, now that more of our employees have kiddos, a cocktail party means that those folks have to find babysitters at peak holiday times (which can be expensive, stressful and – oh yeah, not personally deductible) – hence our family-friendly event this year.
That brings me back to a key point: remember that a holiday party is generally meant to acknowledge the service of all of your employees. Cherry-picking employees for a holiday party is not only inviting a lawsuit from a human resources perspective (ouch!) but a potential tax audit. An invite to the office holiday party should be extended to all employees to avoid the appearance of simply providing entertainment for top level management (the latter would not be 100% deductible). Plus, it’s tacky not to and your mother taught you better.
Finally, check and re-check that guest list. For tax purposes, you can generally only deduct 50% of business-related meal and entertainment expenses. Holiday office parties for employees are excluded from that limit – but if you’re entertaining clients or customers socially (and not to talk business), the 50% limit does apply regardless of whether at your place of business, a restaurant, or other location. Similarly, if you entertain business and nonbusiness individuals at the same holiday party, you must divide your entertainment expenses between the two. This is one of those cases where George Costanza’s fear of “worlds colliding!” makes sense – keep business stuff, business and personal stuff, personal.
Done right, a holiday party can be tax-free to the employees (always appreciated) and tax-deductible to the company. And that makes everybody happy this season.
Just two more important points to consider: no amount of eggnog makes you sound like Michael Bublé and “Grandma Got Run Over By A Reindeer” is not funnier the louder you sing it.
Otherwise, go celebrate. Eat, drink and be merry. Happy holidays!
Security Tax Services LLC
North Sound South Sound
2802 Wetmore Ave, Suite 212 33530 1st Way S, Suite 102
Everett, WA 98201 Federal Way, WA 98003
425.339.2400 253.237.0751
fax 425.259.1099 fax 253.237.0701
No comments:
Post a Comment