Whether you use QuickBooks Online (QBO) or QuickBooks Desktop (QBDT), a common procedure in both is to assign the proper Chart of Account item to the transaction. Selecting the correct account is critical to reporting all your income accurately and claiming all your deductions on your income taxes.
Understanding the IRS regulations for acceptable business deductions is not easy, but it is your responsibility, and errors can result in rejected deductions and penalties.
One of the common mistakes I’ve seen in many of my clients bookkeeping, is the misuse and misclassification of gifts.
We all like to give gifts to employees, customers and vendors to show our appreciation for their hard work, business or exceptional service. It may surprise you to learn that some gifts are not deductible as business expenses.
Here are the general rules surrounding gift giving (the short version).
- You can only deduct $25 per person per year for gift giving.
- Cash gifts, including gift certificates, are considered wages and are subject to taxes. They also do not qualify as De Minimis benefits.
- Some gifts may qualify as “Entertainment” (show tickets) BUT, they must be both ordinary and necessary and meet one of the tests in Publication 463. Entertainment expenses are 50% deductible.
- Holiday parties are generally considered De Minimis.
The IRS is fairly clear regarding gift, entertainment, De Minimis and other gift related items (the long version):
De Minimis Fringe Benefits
In general, a de minimis benefit is one for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical. De minimis benefits are excluded under Internal Revenue Code section 132(a)(4) and include items which are not specifically excluded under other sections of the Code. These include such items as:
- Controlled, occasional employee use of photocopier
- Occasional snacks, coffee, doughnuts, etc.
- Occasional tickets for entertainment events
- Holiday gifts
- Occasional meal money or transportation expense for working overtime
- Group-term life insurance for employee spouse or dependent with face value not more than $2,000
- Flowers, fruit, books, etc., provided under special circumstances
- Personal use of a cell phone provided by an employer primarily for business purposes
In determining whether a benefit is de minimis, you should always consider its frequency and its value. An essential element of a de minimis benefit is that it is occasional or unusual in frequency. It also must not be a form of disguised compensation.
Whether an item or service is de minimis depends on all the facts and circumstances. In addition, if a benefit is too large to be considered de minimis, the entire value of the benefit is taxable to the employee, not just the excess over a designated de minimis amount. The IRS has ruled previously in a particular case that items with a value exceeding $100 could not be considered de minimis, even under unusual circumstances.
In QuickBooks, create an expense account called Fringe Benefits: De Minimus and use this account for any of the items listed above.
Cash is generally intended as a wage, and usually provides no administrative burden to account for. Cash therefore cannot be a de minimis fringe benefit. An exception is provided for occasional meal or transportation money to enable an employee to work overtime. The benefit must be provided so that employee can work an unusual, extended schedule. The benefit is not excludable for any regular scheduled hours, even if they include overtime. The employee must actually work the overtime.
Meal money calculated on the basis of number of hours worked is not de minimis and is taxable wages.
In QuickBooks, use your Wages and Salaries account or create a Taxable Benefits account to track these items separately. Talk to your accountant about putting them through your payroll process so they are included on your employees W-2’s. Charge the occasional meal or transportation money to Travel expense.
Cash or cash equivalent items provided by the employer are never excludable from income. An exception applies for occasional meal money or transportation fare to allow an employee to work beyond normal hours. Gift certificates that are redeemable for general merchandise or have a cash equivalent value are not de minimis benefits and are taxable.
A certificate that allows an employee to receive a specific item of personal property that is minimal in value, provided infrequently, and is administratively impractical to account for, may be excludable as a de minimis benefit, depending on facts and circumstances.
In QuickBooks, use your Wages and Salaries account or create a Taxable Benefits account to track these items separately. Talk to your accountant about putting them through your payroll process so they are included on your employees W-2’s.
Special rules apply to allow exclusion from employee wages of certain employee achievement awards of tangible personal property given for length of service or safety. These awards
- Cannot be disguised wages
- Must be awarded as part of a meaningful presentation
- Cannot be cash, cash equivalent, vacation, meals, lodging, theater or sports tickets, or securities.
In addition, there are other requirements specific to achievement and safety awards and there are dollar limitations that must be met. See Publication 5137, Fringe Benefit Guide or Publication 535 for more information.
How are de minimis fringe benefits reported?
If the benefits qualify for exclusion, no reporting is necessary. If they are taxable, they should be included in wages on Form W-2 and subject to income tax withholding. If the employees are covered for social security and Medicare, the value of the benefits are also subject to withholding for these taxes. You may optionally report any information in box 14 of Form W-2.
You can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year. A gift to a company that is intended for the eventual personal use or benefit of a particular person or a limited class of people will be considered an indirect gift to that particular person or to the individuals within that class of people who receive the gift. If you give a gift to a member of a customer’s family, the gift is generally considered to be an indirect gift to the customer. This rule does not apply if you have a bona fide, independent business connection with that family member and the gift is not intended for the customer’s eventual use.
In QuickBooks, create an expense account called Gifts.
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. Even though an expense may be ordinary and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. In some cases you may not be allowed to deduct the expense at all. Therefore, it is important to distinguish usual business expenses from expenses that include the following. The expenses used to figure cost of goods sold. Capital expenses. Personal expenses.
Disclaimer: This information is subjective in nature and the analysis is based on educated experience of various IRS Regulations and standard business practices. The purpose of this information is solely to assist businesses in their bookkeeping efforts and should not be construed as legal or business advice.