Gift cards can pose complications on your tax returns, depending on to whom you give them.
Gift card donations to fundraisers and charities are tax-deductible, but the IRS has different rules when it comes to cards for your employees.
Q My pizzeria often donates gift cards in support of local fundraisers. Can I deduct these donations from our taxes?
A restaurant acting as a corporation can claim a limited deduction for charitable contributions made in cash or other property. Gift certificates and gift cards are considered cash equivalents, so such donations to fundraisers—for example, a raffle prize at a school club event—are deductible in accordance with the restaurant’s normal method of accounting. Furthermore, since the value of the gift card or gift certificate is easily converted to a dollar amount, the contribution is also deductible if it’s made to or for the use of a qualified nonprofit organization. However, you cannot take a deduction if any of the net earnings of the organization receiving contributions will benefit a private shareholder or individual.
The rules are a bit different when it comes to gift cards given to employees. A small property (noncash) gift given to an employee—such as a Christmas present or tickets to a local sports event—most likely won’t be counted as income for that employee. Instead, it’s usually considered a de minimis fringe benefit, which means its value is so small that accounting for it in their taxes would be unreasonable or impractical. Tax law specifically states that “traditional birthday or holiday gifts of property (not cash) with a low fair market value” will qualify as a nontaxable de minimis fringe benefit.
But that rule does not apply to gift certificates and gift cards given to employees. Since they aren’t cash and tend to be relatively low in fair market value, many assume they qualify as de minimis fringe benefits. Unfortunately, the IRS has not come to the same conclusion. Because gift certificates and gift cards are considered cash equivalents—or easily convertible to cash—they do not meet the requirements to be excluded from the employee’s income. Furthermore, since the value of the gift card or gift certificate can be easily determined, they must be treated as wages, subject to payroll and income taxes.
In other words, if you give your employee a holiday ham, it’s not considered taxable income. If you give your employee a Visa gift card to purchase a holiday ham, it counts as income for the employee, subject to payroll and income taxes!