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Gift Cards for Specific Vendors

edited February 19 in Payroll Advice

Hi All! My company is planning to start some kind of reward program and give out gift cards to employees. Everything I have ever read or been taught tells me that gift cards are taxable.

My Controller is telling me that she did research last year and found that as long as the gift card is to a specific vendor and not a Visa gift card that can be used anywhere, then the gift card would not be taxable. Her examples are gift cards to Restaurants and Honey Baked Ham.

Has anyone heard of this?

Comments

  • edited February 19

  • I have heard of that and several hundred other stories related to gift cards. May I suggest that you read Pub 15B and look at the actual rules. IRC 3401/3402 say that EVERYTHING of value is fully reportable as wages until/unless a formal exception is supported. The exception you are looking for is De Minimus and what you just cited is not part of the De Minimus rules. No more then the famous $25 rule that IRS says never exists.

    HOWEVER, De Minimus might apply if you ignore everything you just said and stay with actual rule. Company provided coffee is non-taxable solely because the tracking costs is excessive compared to the value. If something is rarely done, of little cost and hard to track, you have the state of a De Minimus argument. Fail any of those three arguments and you likely have failed De Minimus. If hypothetically I make my staff work late with little advance notice, this does not happen very often, and I pay with cash (or one of your gift cards) this is probably De Minimus. Please note that the use of the gift card is a non factor here. If instead I give Bob a gift card, any gift card, for being a great employee, that is wages, because it based on job performance and I know who I gave it to. Exactly the same as if I gave Bob cash or cocaine.

    rrupert
  • Cocaine in lieu of wages. LOL. Reminds me of IRS Pub 17:
    "Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity."

    PS David is spot on. If you get an ACTUAL Turkey for Thanksgiving from your boss, no need to report. BUT if you get a grocery store certificate to be exchanged for a free turkey, you may need to report (it's easy to off-load cards/certs at cardpool.com). IRS Pub 525:
    "If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, don’t include the value of the gift in your income. However, if your employer gives you cash, a gift certificate, or a similar item that you can easily exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved."

  • Please note that the turkey is non-taxable, not because it or chickens or eagles are inherently non-taxable, but because IRS very specifically wrote a turkey exception into the De Minimus rules. If you gave out turkeys every week/month, it would no longer be De Minimus.

    Even without Pub 17, per IRC 3401/3402 EVERYTHING of value are wages unless specifically excluded. Pub 17 is just the a variation of the Al Capone rule.

    rrupert
  • Per David "If hypothetically I make my staff work late with little advance notice, this does not happen very often, and I pay with cash (or one of your gift cards) this is probably De Minimus."

    I believe David is talking occasional meal money (i.e. a meal). Cash or gift cards simply for working late is compensation for services and is fully taxable and you may also run into FLSA problems if it is not included in the regular rate of pay if it does not otherwise qualify as overtime compensation (grin).

    I've not researched it lately, but my impression was that a gift certificate for a turkey where the employee goes to a particular store and selects a turkey from a selection of turkeys specified on the certificate by the store and the price and weight of the turkey vary, then this is the same as giving the employee a turkey. That is, the certificate cannot offer dollars off the purchase of a turkey, but must be for a group of turkeys purchased by the employer and the store is simply distributing them for the employer. I did consider that the employee might get cash by selling the certificate but the employee could also sell a turkey.

    BTW, the $25 is an actual limit - but not on de minimis fringes - it is the amount that may be deducted as expense for qualifying business gifts given to any individual during a calendar year. Note the limit is $25 for each individual recipient and not for each gift. Generally, items given to employees are not gifts, but compensation since the gift arises out of the employment relationship.

  • Actually I was not talking cash at all. I was talking about buying staff actual food to eat at work while working late. Cash is ALWAYS taxable. Cards are almost always taxable. Other then that, what Pat said.

    One of the keys with De Minimus is it always has to be rare and unpredictable, and "too small to track". Change any of the points, you lose the De Minimus status. If you had a really smart coffee machine that could cheaply and accurately track who drank what cup of coffee, then coffee would no longer be De Minimus, unless IRS writes a coffee exception.

    johio2
  • We received a notice from our Safety program vendor:

    As your trusted partner in getting the best possible return on your recognition investment, O.C. Tanner keeps a close eye on tax law as it applies to employee recognition programs. The new Tax Cuts and Jobs Act, signed into law on December 20, 2017, modified the language in IRC § 274(j), exclusively disallowing gift cards, cash equivalents and an unlimited array of tangible personal property offerings in service or safety award programs that are tax qualified. This means that compliant companies can deduct the expense of the awards and employees can receive awards tax-free. If you would like more information or if you have questions about the new law, please feel free to contact me.
    How can you know for yourself if Congress’ explicit exclusion of cash, cash equivalents and an unlimited array of tangible personal property offerings rendered your service and/or safety award program non-compliant? Understand the law:
    In TCJA § 13310, Congress explicitly stated that, “[f]or purposes of [IRC § 274(j)]…the term ‘tangible personal property’ shall not include—
    i cash, cash equivalents, gift cards, gift coupons, or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items pre-selected or pre-approved by the employer), or

    ii vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items.”1

    Based on Congress’ specification, a compliant service and safety award program is one that meets each of the following criteria:
    1 Provides an item of tangible personal property.

    2 The award must be presented in a meaningful presentation or ceremony2; and

    3 The award must be provided from a limited offering of items, so as not to give rise to disguised compensation3.

    4 The employer does not exceed certain award value amounts, which are determined by whether, or not, the employer has a qualified plan4.

    Strong employee recognition programs improve employee engagement, employee performance, and company culture.

    1 TCJA § 13310 (a)(3)(ii)
    2 IRC § 274 (j)(3)(ii), Prop. Reg. § 1.274-8(c)(3)
    3 TCJA § 13310 (a)(3)(ii)
    4 IRC § 274 (j)(3)(B)

    This is even more confusing to me.

    "modified the language in IRC § 274(j), exclusively disallowing gift cards, cash equivalents and an unlimited array of tangible personal property offerings in service or safety award programs that are tax qualified. This means that compliant companies can deduct the expense of the awards and employees can receive awards tax-free."

    "In TCJA § 13310, Congress explicitly stated that, “[f]or purposes of [IRC § 274(j)]…the term ‘tangible personal property’ shall not include—
    i cash, cash equivalents, gift cards,"

    "Based on Congress’ specification, a compliant service and safety award program is one that meets each of the following criteria:
    1 Provides an item of tangible personal property."

    So employees can receive awards tax-free, but they have to be items of tangible personal property, and they cannot be cash, gift cards etc??? Is that correct?

  • I think this "trusted partner" was using many words to say not very much except that we can help you be compliant and using the TCJA as an excuse to promote their services to you. What happened may be an example of "your tax dollars at work". Congress simply took provisions of the existing IRS regulation 1.274-3(b) regarding achievement awards and wrote them into the Internal Revenue Code - that is, it codified the regulation. Nothing changed. In fact, the conference report for the TCJA states that “[n]o inference is intended that this is a change from present law and guidance.”

    In case anyone is really interested ---- The following is from the conference report pages 401-408 https://www.congress.gov/115/crpt/hrpt466/CRPT-115hrpt466.pdf I added the asterisks to indicate footnote references to existing law.

    1. Repeal of exclusion, etc., for employee achievement awards (sec. 1403 of the House bill, sec. 13310 of the Senate amendment, and secs. 74(c) and 274(j) of the Code)

    PRESENT LAW An employer’s deduction for the cost of an employee achievement award is limited to a certain amount. 778* Employee achievement awards that are deductible by an employer (or would be deductible but for the fact that the employer is a tax-exempt organization) are excludible from an employee’s gross income. 779** Amounts that are excludible from gross income under section 74(c) for income tax purposes are also excluded from wages for employment tax purposes. An employee achievement award is an item of tangible personal property given to an employee in recognition of either length of service or safety achievement and presented as part of a meaningful presentation.

    HOUSE BILL The provision repeals the deduction limitation for employee achievement awards. It also repeals the exclusions from gross income and wages.
    Effective date.—The provision is effective for taxable years beginning after December 31, 2017.

    SENATE AMENDMENT The Senate amendment adds a definition of ‘‘tangible personal property’’ that may be considered a deductible employee achievement award. It provides that tangible personal property shall not include cash, cash equivalents, gift cards, gift coupons or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items pre-selected or pre-approved by the employer), or vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items. No inference is intended that this is a change from present law and guidance.
    Effective date.—The provision applies to amounts paid or incurred after December 31, 2017.

    CONFERENCE AGREEMENT The conference agreement follows the Senate amendment.

    *778 Sec. 274(j).
    **779 Sec. 74(c).

  • Relevant to the original post - "gift cards, gift coupons or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items pre-selected or pre-approved by the employer), "

    Per Reg 1.274-3 "For purposes of paragraphs (b)(2) (iii) and (iv) of this section, the term tangible personal property does not include cash or any gift certificate other than a nonnegotiable gift certificate conferring only the right to receive tangible personal property. Thus, for example, if a nonnegotiable gift certificate entitles an employee to choose between selecting an item of merchandise or receiving cash or reducing the balance due on his account with the issuer of the gift certificate, the gift certificate is not tangible personal property for purposes of this section."

    This applies to achievement and qualified awards. I knew I had seen that someplace. The question is whether this definition can also be asserted successfully with regard to gift certificates for holiday turkeys under the de minimis rules. This may fall under "common myths" in the same manner as the $25 limit (applies to business gifts, but no de minimis fringes). This is a mea culpa with respect to the turkey certificate assertion. If someone actually knows, I would appreciate a cite to an authoritative source (i.e. code, reg, rev rul, IRM, chief counsel memo, etc)

  • Just a thought, but I would look at IRS pub 15B (Fringe Benefits) and do whatever it says. The law is the law and the regs are the regs, but 99% of the time, IRS works from their own publications. If your issue is not addressed by the pubs, then the law and regs start getting interesting. I remember when IRC(409), a law related to Executive Compensation was passed, and it took IRS something like 4 years to get the law implemented, and many more years for everyone to agree on what IRS's implementation meant. I can remember in 2009 IRS put in MAJOR changes in Section 125, stock and other benefits, none of which had recent changes in the law. If you want to go to court, then the law is very important. If you want to stay out of court, IMO, follow the publications.

    I used to work for a big company you have all heard of. I spent a lot of time researching and writing up a paper that we could legal treat certain payments as income, not wages. In house Legal reviewed the paper and basically said:

    • Yes, we agree with your argument.
    • Hell no, we are not going to do it because we can find no case law of anyone successfully making your argument, and we are not in the business of making case law.

    There is an old saying about the nail that sticks out gets pounded. Follow the IRS pubs and this does not happen

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