Ask The Taxgirl: Deducting Gift Cards

Taxpayer asks:

Hello,

I am an independent contractor and work with teachers. If I purchase gift cards to award those that completed required assessments by the deadline given. Can I deduct the cost of these gift cards?

I would appreciate any information you can provide.

Many thanks,

Taxgirl says:

I love this question because it’s an example of how the specific facts really shape the answer!

In your case, I say yes. And I also believe that it’s not taxable to the teachers. Here’s why:

If an employer gives a gift or award to an employee, the IRS generally considers it compensation and not a gift. There’s an exception for de minimis gifts – you know, gift baskets, boxes of chocolate, those inexplicable little inspirational crystal trophies… Those are considered to have such little value that they are not taxable to the recipient as compensation and the value of the items is generally deductible to the employer as part of the cost of doing business.

There is a specific exception to the exception (don’t you just love tax law!) for gift cards. Gift cards are easy to value and are treated just like cash for tax purposes. They are never considered de minimis which means they are taxable to the employee.

Head spinning yet?

But wait. You’re not the employer here. And they’re not your employees. You have an independent contractor relationship, right? This means that the cards should not be taxable to the recipients as income and they are deductible to you as part of the cost of doing business. Unless, of course, you’re giving the gift cards with the expectation of future services – but that doesn’t sound like the case here.

Whew. Got that?

For specific information on holiday gifts and bonuses, see my prior post on the subject.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.