Posted on

December 2024 Client Profile

Jenny owns a warehousing company and wants to give a holiday party, but she has heard that the cost is either 50% deductible or 100% deductible from business income. Which number is correct, and can she also give cash gifts to employees?

Jenny may have heard two similar IRS rules. The first allows companies to deduct 50% of employee meal costs during the course of normal business. She can deduct 100% of meals provided employees when offering company recreational or social activities, such as holiday parties or annual picnics.

To qualify, the holiday party should be primarily for the benefit of employees other than officers, shareholders or other owners who own a 10% or greater interest of the business.

Jenny can also give cash gifts to employees, but she and her employees should be aware that they are considered taxable income. She could include a gift to each employee that is typically worth no more than $25, which they don’t have to report as income.

Client Profile is based on a hypothetical situation. The solutions discussed may or may not be appropriate for you.

Posted on

Tax Deduction vs Tax Credit

Tax credits and tax deductions may be the most satisfying part of preparing your tax return. Both reduce your tax bill, but in very different ways.

DEDUCTIONS

Deductions reduce how much of your income is subject to taxes. Deductions lower your taxable income by the percentage of your highest federal income tax bracket. So, if you fall into the 22% tax bracket, a $1,000 deduction saves you $220.

CREDITS

Tax credits directly reduce the amount of tax you owe, giving you a dollar-for-dollar reduction of your tax liability. For instance, a tax credit valued at $1,000 lowers your tax bill by $1,000.

Generally, tax credits are more valuable than tax deductions. However, there are times when a deduction can be more useful if it reduces your adjusted gross income (AGI) to allow you to take advantage of tax breaks you wouldn’t receive if your AGI were higher.

REFUNDS

Some tax credits are refundable or partially refundable, like the child tax credit or the American opportunity tax credit. That means if your calculated tax is $600 and you have a refundable tax credit of $1,000, you’ll receive a $400 refund. But most tax credits are non-refundable. That means you won’t receive a refund if using a tax credit reduces your tax bill below $0.

Posted on

December 2022 Client Profile

Vince owns a construction company, and during the holidays, he lets employees volunteer at their favorite charity and pays them for their time. Can he deduct these employee payments from his business tax return?

Although Vince is serving his community by encouraging his staff to contribute their time or skills to charity, the payment he makes to his employees doesn’t qualify as a charitable deduction. Instead, he should pay his employees if they volunteer during regular working hours, which would be recorded as payroll expenses.

However, if he incurs direct, non-payroll expenses on behalf of his employees’ volunteer efforts, he generally can deduct those as a charitable contribution. For example, if he supplies building materials for his employees to serve with Habitat for Humanity building homes, the construction materials he provides will be tax deductible. He needs to keep receipts for all donated materials and may need a written acknowledgment for amounts over $250.

Client Profile is based on a hypothetical situation. The solutions discussed may or may not be appropriate for you.