‘Tis the season for company parties and year-end bonuses. If you’re a small business owner, you may be planning a get together for your employees to celebrate the season and hopefully a successful year for your business. Depending on what type of party and bonus you provide to your workers, the cost may be fully deductible at tax time.
Whether it’s lunch at the café across the street or a catered dinner and dance, staff parties are a terrific way to show your employees they’re appreciated. Generally, only 50% of meals and entertainment costs are deductible as business expenses. Luckily, the rules for company-wide events are different.
As long as your event meets certain requirements, the full 100% of the expense can be tax deductible. The main requirement is inclusivity, meaning that the event must be open to all employees – not just a select group. Also, the cost of the event cannot exceed $100/person – not including the cost of extras such as transportation to the event or taxi fare home. Let’s look at a couple of examples.
Scottish Bakery had an excellent year. Sales were up so Scott, the owner, has decided to host a company-wide holiday party, complete with food and entertainment. The venue is charging $85 per person for the event. Employees can bring their spouses and children to the event. The cost of the event is deductible at the 100% rate because all of Scott’s employees are invited and the cost per person is below $100.
Scott has also planned a separate luncheon for his current manager, head baker, and administrative assistant. Only those three individuals are invited to attend. Because only a select few of the staff are invited, the 50% meals/entertainment rule applies. Only half of the luncheon expense is tax deductible.
Cash Gifts and Gift Cards
If you’re planning on giving your employees a holiday bonus, certain rules apply as well. Many gifts to employees are considered a taxable benefit. For gifts, it’s not a matter of including everyone – the type and value of gift determines the status as a taxable benefit. Let’s use our bakery example.
The employees of the Scottish Bakery all received a surprise with their December pay cheques. The part-time workers each received a $200 cash bonus while the full-timers each received new flat screen TVs valued at $500 each.
- The cash bonus recipients
- Will have the $200 added to their employment income (box 14) on their T4 slips. Another entry naming the exact amount of taxable benefit ($200) will appear in a lower section of the T4 – Box 40.
- The payroll department should deduct the appropriate amounts of income tax, CPP premiums, and EI premiums.
- The gift recipients
- No tax implications to the employees because the gift’s value and the fact that the gift is not cash. The cap for non-cash gifts of this type is $500. If the TVs were valued at $700, the treatment would be quite different. The amount over the $500 cap ($200) would be considered a taxable benefit and would be taxed as such. The $200 overage would be added to employment income on the employees’ T4s, designated in Box 40, and subject to income tax and CPP premiums (no EI premiums for non-cash gifts).
If Scott decides to give a different type of gift to his employees, there may also be taxable benefit. Gift cards are generally considered to be “like cash”. Because there’s an element of choice with a gift card, it’s treated differently than a TV. If you’re given a TV by your boss, you have a TV. If you’re given a Best Buy gift card instead, you can choose to buy a TV, Xbox, or the complete set of Little House on the Prairie DVDs. It’s all about the choice.
Regardless of the activity, bonus, or event, keep all of the receipts associated with your holiday gift for tax time. It’s a good idea to label each receipt so you’re sure to claim the proper amounts at the proper rate. With step-by-step guidance for entering all of your business income and expenses, TurboTax Home & Business takes the guesswork out of your small business tax return.
Jennifer is the Social Care Manager for TurboTax Canada. When she’s not helping customers on Facebook, Twitter, and TurboTax’s community forum AnswerXchange, Jennifer is busy researching the latest tax changes.
Jennifer has been preparing tax returns for over 30 years and enjoys holding tax seminars for seniors in her hometown of St. Vincent’s, Newfoundland.