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Is gift cards for employee bonuses a business expense?

TL;DR

Gift cards given as employee bonuses are generally deductible as a business expense, but they must be included in the employee's taxable income as they are considered cash equivalents.

Detailed Answer

Gift cards are treated as cash equivalents by the IRS, meaning they are subject to the same tax rules as cash bonuses. Therefore, while a business can deduct the cost of gift cards given to employees as a business expense, the value of the gift cards must be included in the employee's wages and reported on their W-2 form. This is because gift cards do not qualify as de minimis fringe benefits, which are typically small, non-cash gifts that are not subject to taxation. For example, a $50 gift card given as a holiday bonus would be deductible for the employer but must be reported as $50 in taxable income for the employee.

Where to Put It on the Tax Form

Schedule C, Line 26 (Wages) for sole proprietors; Form 1120, Line 13 (Compensation of Officers) or Line 18 (Salaries and Wages) for corporations.

Real World Example

A freelance graphic designer decides to give each of her two part-time assistants a $100 gift card as a year-end bonus. She can deduct the $200 total as a business expense on her Schedule C, but she must also include the $100 per assistant as taxable wages on their respective W-2 forms.

Audit Risk & Documentation Tips

The audit risk level for deducting gift cards as bonuses is moderate. To substantiate this deduction, keep detailed records including the date, recipient, amount, and business purpose of the gift cards. Ensure that the value of the gift cards is properly reported as wages on the employee's W-2 forms. Retain copies of receipts and any correspondence related to the bonuses.

IRS Reference

IRS Publication 15-B (Employer's Tax Guide to Fringe Benefits), IRS Publication 535 (Business Expenses).

Relevant Industries

Small Business OwnersFreelancersConsultantsRetail BusinessesService Industry

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Disclaimer: This is for informational purposes only and should not be construed as tax or legal advice. Always consult your tax advisor.

Page created on July 25, 2025

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