Key Takeaways
- Company-wide holiday parties for employees (categorized as Employee Recreation/Entertainment) are generally 100% deductible, but confirm with your CPA.
- Meals with clients must be logged separately as Client Meals. Your tax preparer will apply the 50% limitation.
- Employee gifts qualifying as “de minimis” do not go through payroll. But cash and gift cards must be processed as taxable wages and run through payroll.
- Make sure to track Client Gifts per recipient, as this expense has a strict $25 annual limit for tax purposes.
Questions that might’ve been on your mind recently:
Where should we have the company holiday party?
Does the wreath I picked up at Costco for my Suffolk County business’s front door count as a business expense?
Which is why today, I want to break down how to properly categorize your holiday expenses so your tax preparer has everything they need to maximize your tax benefits.
Is my company’s holiday party tax-deductible?
A true “company-wide” event (one where all employees are invited) should be recorded in an Employee Recreation/Entertainment expense account. It’s generally eligible for a 100% deduction.
But there are two big conditions for your tax preparer to claim the maximum deduction:
1. The party must be primarily for employees. Employees’ spouses/family are included as well. But if the event centers around owners, executives, or only a select group of higher-ups, the expense may be classified differently, and the deduction may evaporate.
2. The event cannot discriminate in favor of highly compensated staff. In other words, everyone from your office manager to your warehouse team needs to be invited.
If you meet those two criteria, the whole ordeal (food, band, décor, venue rental, even valet parking) can fall under the 100% deduction umbrella.
Now, if a guest is a client, prospect, vendor, or independent contractor, their meal component must be tracked separately as it is subject to the 50% limitation.
So, if you invite a handful of these assorted guests to your holiday event, you have to meticulously allocate and track event costs among:
- Employees (100% potential deduction)
- Meals for clients, associates, or 1099 workers (50% deduction limit)
- Any entertainment portion for non-employees (0% deduction)
(Most business owners avoid mixed-guest parties for this exact reason. Tracking this allocation accurately in your books is a significant bookkeeping hassle.)
Holiday party costs: what can I deduct on taxes?
If your event is primarily for employees, be sure to track and include:
– Food and beverages
– Alcohol
– Catering staff
– Venue rental
– Décor and invitations
– Music or entertainment
– Parking or transportation
– Security
– Event-planning fees
If it’s directly tied to the party, it probably counts for the deduction and should be tracked under the Employee Recreation account.
Are employee gifts tax-free?
Holiday gifts to employees fall into two categories, which dictate how they are handled for payroll:
1. “De minimis” gifts: These are small, occasional items so minor that tracking them would be unreasonable. Like a modest gift basket, a branded mug or sweatshirt, or small-value snacks or treats. They should be recorded as Employee Supplies.
These are 100% deductible to the business, are not taxable to your employee, and do not need to be run through payroll.
2. Cash or cash-equivalent gifts: This includes cash, checks, Visa/Mastercard gift cards, store gift cards, and anything that can be exchanged for cash-value goods.
These must be treated as taxable wages, run through payroll, and included on the employee’s W-2.
Basically, if the gift feels like pay, you must treat it like pay in your payroll system.
What can I deduct on taxes when it comes to gifts to clients?
You must track the $25-per-recipient-per-year limit on client gifts in your records. For example, if you give a client a $40 gift basket, only $25 of that will be considered for the deduction.
There is an exception here: Promo items costing $4 or less with your logo (pens, mugs, branded ornaments, etc.) should be tracked separately as Promotional Materials, as they do not count toward the $25 limit.
Are business decorations and office holiday enhancements deductible?
Generally, yes.
Holiday décor that enhances your Long Island workspace (a tree for the lobby, garlands for the reception desk, lights for your storefront) typically qualifies as an ordinary and necessary business expense. These items should be recorded as General Office/Ordinary Business Expenses.
But if decorations spill into personal use (for example, you bring them home afterward), your tax preparer may need to reduce the amount claimed. So be sure to keep these expenses strictly business.
A final word
If you’re unsure how to track and categorize your holiday festivities, that’s exactly why I’m here. Before you finalize your party budget or start ordering gifts, let’s take a few minutes to map out the required documentation and categorization for all your expenses:
FAQs
“How should I categorize a team dinner if we don’t host a full holiday party this year?”
It needs to be recorded as a Business Meal (50% rule), not as an Employee Recreation Event (potential 100% rule). The intent and guests matter for categorization.
“How should I process holiday bonuses?”
They must be run through payroll and are fully taxable to employees.
“Can I deduct gifts I buy for my own family if they work for the business?”
Only if the gift is truly for the employee’s role. And even then, cash or gift cards are still taxable and must still be run through payroll.
“Can I donate leftover party food or items to charity and deduct it?”
You can, but only certain types of unused goods can potentially be claimed by your tax preparer. Record the fair market value and charity name for all donated items.
“What expenses should I track if I host a virtual holiday party?”
Food delivered to employees’ homes for a virtual celebration should be tracked as Employee Recreation and may still qualify. The IRS hasn’t formally ruled, but current guidance supports tracking these when the intent matches an employee recreation event. So, as always, keep clear documentation.
“Do I need to keep a guest list for my books and records?”
Absolutely, yes. It’s often the key piece of evidence your tax preparer needs to secure the deduction during an audit.