Are business gifts and awards tax deductible?

Many entrepreneurs and small businesses are not aware of the tax implications of gifts given to employees, customers and business associates or awards given to employees. There are some specific limits and rules around gifts and awards that you should understand. First, you can deduct gifts to customers, clients and business associates, but you are limited to $25 per recipient per year. That’s really a low amount. This limit was set in 1954, when gas was 25 cents a gallon, and has never changed. Try sending flowers or a fruit basket for less than $40! (It may be time for a new tax act to change this rule.)  You are allowed to deduct the cost of engraving, packaging and mailing the gift separately, provided the added cost is incidental to the gift itself. When you give a customer tickets to a football game, a concert, a play, etc., the IRS says you can treat it either as a gift or as entertainment expense, which is 50% deductible. In most cases, with the high cost of sporting and arts events, it will usually make more sense to call these expenses “entertainment” rather than gifts.

Can you combine limits?

With this low limit on business gifts, you might try to get around it by combining limits of your client, their spouse, their children, etc. However, the IRS considers married couples to have one $25 limit between the two of them. You can have a separate limit for the client’s child if you have a real business relationship just with that child. This assertion might not fly if you’re giving a small child a nice bottle of French Bordeaux. The gift must be appropriate for the recipient. The IRS does not let you combine your limit with your spouse’s limit for the same individual, even if you both have real business relationships, separate from one another, with the same person. They just don’t want you to go over that $25 limit!

Gifts to employees or co-workers

Now, let’s talk about gifts to your employees or co-workers. Low-value gifts to employees are fully deductible. What’s a low value gift exactly? This is not defined in the tax code, so it’s really up to you and your tax/legal team to decide. The most popular gift to employees is cash or gift cards. They are perfect for any occasion! But as employee gifts, cash, gift cards and other cash equivalents are considered taxable compensation to be included on the employee’s W-2. So maybe gift cards are not the perfect gift after all. Achievement awards to employees are not treated as gifts or taxable income. If the achievement award is $400 or less, is presented to employees at a “meaningful presentation”, and is not cash, gift cards, securities, or other cash equivalents, it is deductible in full and not taxable to the employee. If your business has a documented qualified employee achievement award program that does not discriminate in favor of highly compensated employees, you can give out fully deductible achievement awards of up to $1,600 per year per person,  but the gifts cannot be cash or cash equivalents.

Say no to gifts to officials

What about gifts to police officers, regulatory inspectors, and government officials? (Whoa, just typing that made me feel all queasy inside.) You need to steer clear of these types of gifts, which may be considered bribes. Obviously, bribery is illegal in the U.S., as it is in most countries around the world. However, bribes are commonly used in some places to help “grease the wheels”, to secure approvals, and to win contracts.  As a U.S. company doing business in another country, you are prohibited from bribing by the Foreign Corrupt Practices Act (FCPA), which carries stiff monetary penalties and/or jail time for those found guilty. Anything that could be construed as a bribe, including trips, accommodations, etc., as well as cash, is subject to the FCPA as circumstances dictate. So if you paid for the Defense Minister of Country X’s spouse to go to fashion week in New York City, complete with prime tickets to her favorite designers’ shows, and within a few weeks your company sold Country X’s military a large order of insect repellent, you may get a visit from the U.S. Department of Justice. Consult with an attorney if you’re still thinking about using this tactic. I’ll say it, even though it should go without saying, that bribes, and the associated fines from the U.S. government, are not deductible.
In summary, deductions for gifts to customers, clients, and business associates are limited to $25 per person per year. Gifts to employees do not have a limit but they must be “reasonable”. If cash or cash equivalents are given, they must be reported as compensation and taxed, in order to be deductible. Certain employee award programs have higher limits for gifts, but require other compliance measures. As is usually the case, documentation is your friend when it comes to deducting gift expenses.

DiRenzo & Bomier, LLC welcomes new Attorney, Mary Stahler

DiRenzo & Bomier, LLC is pleased to announce the addition of Mary Stahler.  Mary is joining the firm after recently graduating from the top of her class at Valparaiso University Law School.  Mary’s primary practice areas will include trusts, estates, real estate, and business transactions.

Travel & Entertainment: Is the Company Holiday Party Tax Deductible?

Company picnics, parties and other events can be tax deductible, provided you have good documentation and understanding of the rules for tax deductible expenses.
Companies throw parties for different reasons. Sometimes it is primarily as a morale booster for employees or as a team building exercise. Sometimes spouses and family are invited and sometimes they are not. Customers, clients and other business associates are sometimes invited to company parties and events as well. Companies sometimes host parties just for customers, business associates and the employees who interact with them.
In order to determine how picnic/party/event expenses need to be treated, you have to determine what the purpose of the event is and who actually attends.  Do you know what you can deduct from your taxes?

What is deductible?

• Costs for your employees are 100% deductible
• Costs for the general public to attend (i.e., a blanket invitation to the community) are 100% deductible
• Costs for spouses, plus-ones and family members of employees are 100% deductible
• Costs of business associates and customers attending are either not deductible at all or 50% deductible
• Costs of friends who attend are not deductible

Parties that include business associates and/or customers and clients are only deductible if there is a short business presentation or announcement at the party. It helps to document this presentation in the agenda or invitation for the party. Minus this formal announcement, attendees who are not employees or associated with an employee are considered to be at the party as friends and therefore not deductible.
You should have a method of checking in attendees to your company event, especially if there will be a mixture of employees and others at the event. This could be as simple as writing down who was there, for small gatherings, or as complicated as having name tags with electronically collectible information for very large events. Either way, you will have a record of who was at the event and their relationship to the company.
For most picnics and parties, it is easiest to divide up the average cost per attendee and allocate it to each group (employees and their plus-ones, business associates, friends) pro rata. However, if you have direct cost information especially for major costs, use it accordingly.
What if you have your event at the country club? Can you deduct your membership fees? The answer is no,  but you can deduct any costs directly associated with the party itself.

Are the costs of an event taxable to the employee?

They can be if the event is only open to certain employees as a reward, involves travel and the cost is high. Otherwise, parties, picnics and the like for employees are considered de minimus benefits that are not taxable. If you include costs of the event in the employee’s W-2 for an event that is really an incentive award, you can take all of the cost as a business expense.

Read more on this topic

Search for Pub. 463 at irs.gov under IRS Forms and Publications.

Wisconsin Access to Justice Commission Highlights Meghan Healy in its Pro Bono Spotlight

“My parents. Definitely, my parents,” responded Attorney Meghan Healy when asked what prompted her to become a volunteer in numerous social justice organizations. Meghan, her father Howard Healy and sister Kathleen Healy all practice with Di Renzo & Bomier in Neenah and all have volunteered for the Winnebago County Legal Clinic since its inception in 2008. The clinic is held at three locations in the Fox Valley  – Menasha, Oshkosh and Neenah – once a month. Meghan volunteers at the Menasha site.

Meghan’s parents were always involved in community and charitable organizations when she was growing up, and their example taught her the importance of giving back. She also credits the values she learned during her Catholic schooling (from first grade through Marquette Law School). “I feel I would be neglecting my responsibility if I didn’t give something back in whatever way I can,” Meghan said, “and I’m especially happy to be able to do so in the city where I grew up.”

She also credits her firm, Di Renzo & Bomier for supporting her pro bono work. Meghan’s father has done legal work for nonprofits for many years, and the court occasionally calls on lawyers in the firm to accept cases on a pro bono basis. Meghan also provides pro bono representation to residents of the Christine Ann Center, a domestic abuse shelter, in obtaining restraining orders. “I think it helps them in a lot of ways,” she said, “because women and men and children who never would have gone forward with filing a restraining order are now doing so.”

In discussing her work at the legal clinic, Meghan said, “It feels wonderful to know that you have made a difference in someone’s life. You know that if you hadn’t been there, that person’s life could have been much different.” She gave the example of one of her father’s cases that started withhelping a tenant at the legal clinic. The tenant, who didn’t speak English, was facing eviction after a dispute with a landlord about an unresolved mold problem. Without the assistance her father provided, it’s likely the tenant would have been out on the street.

“I think the legal clinic in our area has helped many people, but it’s really just putting a Band-Aid on a bullet wound. There’s a much greater need, and I think we need more lawyers to step up to the plate,” Meghan stated at a public hearing held by the Access to Justice Commission in July 2012. The once-a-month legal clinic in Menasha averages more than 40 attendees seeking advice. “A lot of times I take people’s numbers and call them the next day because you can’t do a lot when you have 15 or 20 minutes with people,” she said.

“Those who go to law school do it because they want to make a difference in people’s lives. What better way to make a difference than to assist someone who needs help but doesn’t have the knowledge or ability to handle it themselves? Each of us should consider it a responsibility to give back where we can.”

Meghan also volunteers for the United Way, Winnebago County Teen Court, the Neenah-Menasha YMCA, and as a mock trial coach at St. Mary Central High School.

Debit or Credit?

With the recent waves of identity theft at Home Depot and Target, when a cashier asks you Debit or Credit, your answer could have financial ramifications.  DiRenzo and Bomier recommends that you speak with your bank as to the ramifications of the use of the particular cards that you may have.

For example, if you use a debit card and that information is stolen, depending on the rules of your particular financial institution, your liability can be potentially unlimited.  On the other hand, if a credit card is used without your authorization, liability is capped at $50.

Remember,  the answer to the question Debit or Credit can make a difference, make sure you look into this with your Debit card issuer if you are concerned. 

The National Trial Lawyers

The National Trial Lawyers has asked Attorney Jeffrey Berzowski of DiRenzo & Bomier, LLC to be listed as a Top 100 Trial Lawyer in the area of Civil Plaintiff Practice.

Here is a link to the website:

http://www.thenationaltriallawyers.org/top-100-trial-lawyers-directory/?state=WI&association=Civil+Plaintiff

DiRenzo & Bomier Recovers an Amount 295 times the Insurance Company’s Original Offer

In a fairly recent case, a client hired us to represent her related to a serious motor vehicle accident.  She originally hired another law firm and while represented by that firm, she received an offer to settle her claim for $500 because the insurance company felt that the client was not seriously injured and would not need any further treatment.  After the client hired us, we reviewed the injuries sustained by the client and determined that it was not appropriate to attempt to settle her claim as she was still treating and had not yet reached a healing plateau.

 

The client ultimately had to undergo a back fusion surgery.  After that surgery, we obtained an opinion letter from the doctor relating that surgery to the accident.  After negotiating with the various insurance companies involved in this matter, the matter settled for $147,500 which were the applicable policy limits less a small reduction.

 

Many clients ask us, why should we hire you when we can get an offer on our own?  The answer to that question is simple.  In the hands of an experienced personal injury attorney a case that may have been settled early on for a lower number can, under certain circumstances, result in a much more favorable outcome for the client as evidenced by the above matter.  While this was a drastic example of an extremely favorable outcome, it demonstrates that there are certain jobs that need professional assistance and in most cases, car accidents fit that bill.

Court rulings on WFEA can make missteps costly

Wisconsin employers need to be aware that the Wisconsin courts are interpreting the Wisconsin Fair Employment Act ("WFEA") very liberally. The WFEA was put into place to accomplish the worthy goal of preventing workplace discrimination.

This act applies to any employer in Wisconsin that employs at least one person. Therefore, if you have one or more employees working for you, this is an area of the law that you should be aware of.  The WFEA prevents discrimination based on many different characteristics. Recently, the interpretation of this act in the area of accommodations for employees with disabilities has put Wisconsin employers on notice. In the words of one Wisconsin Supreme Court justice, Wisconsin is undergoing a "sea change" in employment law.

One recent case that places a high burden on employers is Hutchinson Technology v. Labor and Industry Review Commission. The case involved Hutchinson Technology Incorporated "11-11"), a manufacturing plant in Eau Claire. The management of HTI decided that it would implement 12 hour shifts to improve efficiency and to meet the preferences of HTI employees. FITI did not routinely allow its employees to work less than a twelve hour shift. Susan Royek was an employee at HTI who worked in the production department. When she was hired, Royek understood that she was required to work twelve hour shifts per company policy.

While employed at HTI, Royek was diagnosed by her personal physician with lower back problems in the form of disk problems. HTI requested that she undergo a fitness for work evaluation and based on that evaluation, it was determined she could steadily work eight hour shifts five days a week. Royek was unable to work 12 hour shifts per company policy.

Because she could not work the 12 hour shifts required of HTI employees, the company terminated her employment. Royek filed a complaint with the Equal Rights Division of the Wisconsin Workforce Development Department and alleged that her termination was discriminatory. More specifically, that she was discriminated against because she had a disability.  Royek's case eventually found its way to the Wisconsin Supreme Court. That court decided  that HTI discriminated against Royek based on her disability when it terminated her.

In coming to this conclusion, the court relied on another of its fairly recent opinions entitled Crystal Lake. Cheese Factory v. LIRC. In that case, the court held that an employer had to make accommodations for an employee that was rendered a quadriplegic in a non-work-related accident. The Crystal Lake employee could no longer meet the pre-injury job requirements and the court held that a change in job duties was a reasonable accommodation. In other words, the employer had to retain an employee that could no longer complete all of the tasks that she was hired to perform.  In Royek's case, the court decided that it was not unreasonable for HTI to allow her to work eight hour shifts instead of the company policy that required twelve hour shifts The court stated that in disability accommodation cases there are three steps. First, the employee must prove that he or she has a disability. A disability is a condition that "makes achievement unusually difficult or limits the capacity to work." Second, the employee must demonstrate that an accommodation for the disability exists. Third, if the employee proves the fast two steps, the employer can argue that the requested accommodation imposes a hardship on the company. In determining whether a requested accommodation imposes a hardship, the Wisconsin Supreme Court has imposed a very high hurdle for employers to clear.

The court recognized that employers have a right to set their own employment rules. However, those rules must "bend to the requirements of the WFEA." One of the Wisconsin Supreme Court judges that disagreed with the opinion stated that the WFEA in certain cases now requires Wisconsin employers to "forego valid business decisions."

While I am certainly not condoning any blatantly discriminatory practices in Wisconsin workplaces, I do believe that the recent decisions of the Wisconsin Supreme Court in this area of the law have placed a heavy burden on Wisconsin

employers that need to be taken to heart.

Employers may now be required to retain employees that cannot fully perform their jobs or cannot meet workplace rules. It is clear that one wrong decision by an employer in how an employee with a disability is treated can become a costly mistake.

The Dreaded Self-Employment Tax – Three Things You Can Do To Manage It Better

Small business people, entrepreneurs, and independent contractors should know before they start that they will probably have to pay self-employment taxes on their net income. But just in case you hadn’t heard the news, you have to pay self-employment taxes on your net income! So what is self-employment tax anyway? First, it is not income tax, it is in addition to income tax. It is FICA and Medicare taxes on your net earnings from your small business.  However it’s different from the FICA and Medicare taxes you may have noticed being withheld from your paycheck because you are paying both the employee and the employer share of FICA and Medicare taxes.

Here’s what the self-employment tax is:

• FICA employer and employee portions of 12.4% (6.2% + 6.2%) for self-employment income of up to the FICA income limit ($113,700 in 2013). 
•  Medicare employer and employee portions of 2.9% (1.45% + 1.45%)
•  Total self-employment tax rate is 15.3% on net business income (generally income from Schedule C or certain partnership income) multiplied by 92.35%. 

You also get a deduction for half of the calculated self-employment tax for the year, just as you would if you were an employer paying your share of your employees' FICA and Medicare taxes. 

Here’s an example. Carl is a master mechanic who now makes sculptures from old car parts. His business, Carl’s Crankshaft Creations, made a profit last year of $45,000. Carl will have self-employment tax of $6,358 ($45,000 X .9235 X 15.3% = $6,358) on those earnings, plus income tax of $4,008.

Unfortunately Carl did not plan for these taxes and he is shocked that he owes so much money. Last year, when he worked as an employee at the Chrysler dealership and made only $32,000, he always had a refund. He was planning to spend this year’s refund on a new set of tires for his truck.  His life is ruined!

Carl has forgotten that he owes self-employment tax, as well as income tax, on his business income. When he was an employee, the Chrysler dealership withheld FICA, Medicare and income taxes from his $32,000 paycheck. Carl was not taking home $32,000. He was paying taxes every time he got paid, and he actually paid more than he needed to, hence the big refund.

Carl was very upset about his taxes, and has vowed that this will never happen again. But how can he avoid the same problem next year?

1.   File and pay this year’s taxes as soon as possible. If you have to stretch out the payments, there are options that the IRS and the states will accept.The worst option is to not file or attempt to pay your taxes. Taxes do not go away if you do not file a return, they just linger and grow with interest and penalties on the unpaid balance. It’s best to face up to your taxes and just get them paid off.

Carl had been saving some money for a business trip, so he was able to make a big dent in his taxes with the first payment.  He paid the rest of the tax balance within two months of filing his tax return. He didn’t get to go to the American Association for Appreciation of Automobile Aesthetics Convention in Arizona, but at least he doesn’t have that old balance hanging over his head.

2.    Set up a personal withholding account which is separate from your business or personal checking account. Deposit monthly an amount equal to 14% plus your effective income tax rate on self-employment income each month (usually 20-30 percent). Make quarterly payments from this account and resist the temptation to tap it for other purposes if at all possible!

Carl set up a savings account and began funding it every week  from April 15^th on. Money was tight because he was also trying to pay off his last year’s taxes at the same time, but once that was done  it was pretty easy. He paid his first quarterly payment for the current year in May, which was late, but was able to make the rest of the quarterly payments on time.

          3.  Plan your business income for this year and take action as appropriate to get to your target business income. Consider setting up a small business retirement fund (a 401K or SEP) as a strategy for lowering your income taxes. If your business is very profitable consider converting it to an S-Corporation and paying yourself a paycheck, so you have no self-employment income and you can withhold taxes through the company. Monitor your business and other income throughout the year to ensure the amount you’re paying in quarterly is sufficient. 

Carl consulted with an accountant to consider options for his business. He decided he was not yet ready to become an S-Corporation, as his business income had not stabilized, but he settled on a target income for his business and set up a simple budget to keep his spending in line with the target. His accountant prepared financial statements for Carl each quarter to review actual results versus the target. When the accountant prepared Carl’s tax return for this year, he had already paid most of the balance through quarterly payments, so the balance due was minor.

Carl sounds a little like that goody-two-shoes kid you wanted to beat up in third grade because he’s so perfect. We don’t always live in the same world as Carl, and unexpected expenses or downturns in your cash flow do happen from time to time. The point is that you’re probably going to have to pay taxes, whether they are paid today, next year, or over the next 5 years. If you want to feel better about it, just remember that if you have to pay taxes that means you made a profit which is actually a good thing.