Ah, 2020. It’s the gift that keeps on giving. As we head into the home stretch, employers are wondering what on Earth they’re going to do about their annual holiday parties thanks to the COVID-19 pandemic. Last year, 76% of businesses held office parties in December. This year? Only 23% are planning a year-end celebration, and 74% of those will be virtual events.
The web is stocked with tips on holding virtual parties and other safe alternatives, from remote wine tastings to online escape room packages. But what about the tax implications for these expenses?
If you’re concerned about how changes to your party plans may affect your tax deductions, consider the following factors. You’ll want to discuss each with a tax professional because whether they’re deductible or not may come down to how current regulations are interpreted (regulations that weren’t written with 2020 surprises in mind).
- Location, location, location. Virtual parties weren’t a consideration when the Tax Cuts and Jobs Act (TCJA) defined a tax-deductible party as being on premise as opposed to at a secondary location like an event venue or restaurant. What about expenses for a virtual party when being on premise just isn’t possible? That’s a good question (and one that you should discuss with your CPA).
- Food, glorious food. You might assume you can simply tell employees to get themselves a nice meal on the company’s tab to enjoy during a holiday Zoom call, but such a meal may not be deductible (or, at least, the 100% deduction for meals included in a holiday party on premise may be reduced to a 50% business meal deduction).
- Who’s on your guest list? You may also have a brilliant idea to allow executives and those working on premise to party in person while remote workers are given different treatment, but that will put the deductibility of the in-person party at risk. TCJA rules that any 100% deductible holiday party must primarily benefit employees who are not high ranking or highly compensated.
- Gifts that keep on giving. A longstanding workaround to these problems may be the de minimis fringe benefit loophole. It exists to allow employers to give staff members small gifts (the precedent is a gift under $100) that can include holiday gifts and occasional snacks or meals tax free and without it affecting the employees’ taxable incomes. While you may not have considered certain aspects of your holiday party de minimis gifts to them before, that might be an appropriate category for your holiday party expenses in 2020.
- Bonus complications. If you’re forced to scrap holiday festivities this year and, instead, want to hand over that unused budget to your employees, be careful. Bonuses and other supplemental wages like cash-based prizes or awards carry with them tax withholding consequences. Before turning your party fund into extra compensation for employees, first consider what effect that will have on your company’s and your employees’ tax obligations.
Another point worthy of note: If you accepted Payroll Protection Program (PPP) or other relief funds this year, your ability to deduct the holiday expenses you normally deduct may be compromised. Be sure your tax advisor is fully aware of what money you may have borrowed and how it was used so that they can paint a clear picture of how your taxes will be affected. As always, feel free to contact us with questions.