At this wonderful time of year, we are often asked about whether the value of a turkey, ham, or other item of merchandise purchased by an employer and distributed generally to each of an institution’s employees at Thanksgiving – or Christmas – might constitute wages subject to income tax withholding or income subject to tax for income tax purposes. In most cases the answer is, No. But what about coupons, vouchers, or gift certificates?
For example, at a College’s annual campus-wide “Thanksgiving Feast,” the President and Academic Dean of the college go around and give each staff/faculty member a card containing a certificate/coupon/voucher for a 16-18 pound turkey at a local grocery store. Everyone also gets a personal “Happy Thanksgiving – we are very thankful for you!” handshake – or hug.
First, it would generally be okay to hand out turkeys or hams. Also, we know that the IRS considers gift certificates that are redeemable for any merchandise to be taxable income to the employee (and includable in Form W-2). But what about these “certificates” that can ONLY be exchanged for a turkey?
It is our thought that these certificates/coupons/vouchers would generally not be considered gift cards. The IRS has stated that whether a “gift coupon” (now more commonly referred to as a gift card) is redeemable in cash is not the determining factor here.
We would make the case that it would be administratively impractical to try and accumulate each and every “redeemed value” for every turkey redeemed. Also, given the language used by the IRS in a 2004 Tax Advice Memorandum (TAM), it may be prudent to call these items “certificates” rather than “coupons.”
Please note that a gift card of a stated amount would clearly be taxable to the employee based upon the 2004 TAM – which ultimately employs the “same as cash” reasoning. Also, as stated by the IRS in Notice 2017-9, taxable gift cards would not be covered by the Form W-2 “de minimis error safe harbor.”
From Revenue Ruling 59-58:“It is accordingly held that the value of a turkey, ham, or other item of merchandise of similar nominal value, distributed by an employer to an employee at Christmas, or a comparable holiday, as part of a general distribution to employees engaged in the business of the employer as a means of promoting their good will, does not constitute wages subject to income tax withholding or wages for Federal Insurance Contributions Act or Federal Unemployment Tax Act purposes.”
“…The foregoing rules will not apply to distributions of cash, gift certificates, and similar items of readily convertible cash value, regardless of the amount involved.”
From Technical Advice Memorandum 200437030:
Whether a gift coupon is “redeemable in cash” is not determinative of whether a gift coupon is a “cash equivalent fringe benefit” for Income Tax Regulation § 1.132-6(c) purposes. Neither the statute nor the regulations pertaining to de minimis fringe benefits define a cash equivalent fringe benefit as one that can be readily converted to cash. Instead, we look to the language of Code § 132(e) which requires a determination of whether it is administratively impracticable to account for the gift coupons provided in this case.
TO REVIEW…
Happy Thanksgiving to everyone and please know that we are very grateful for you and your institutions!
Certificates/coupons/vouchers redeemable only for a turkey equate to distributing turkeys (or Christmas hams) by your organization and should not be taxable to the employee.
Remember that gift cards – which are so prevalent these days - are generally going to be taxable and includable in employees’ compensation.
Be sure you are knowledgeable about the “ins-and-outs” of holiday employee gift giving – in order to keep things “non-taxable.”
Written byDavid C. Moja, CPA www.mojacompany.comThe information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.
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