The Business Side of Giving Gifts
Christmas is a time of gift giving and many family child care providers give gifts to the families of the children in their care. Gifts range from the homemade (winter scarfs, photo albums showing pictures of the child from the past year) to books and pillow pets, to gift certificates.
What are the tax consequences of giving gifts to children and their parents?
Now you may think that I’m being Scrooge-like to discuss taxes when talking about gifts, but that’s what my website is about!
IRS rules say that you can deduct gifts as a business expense up to $25 per person per year. This means that if you give $25 worth of gifts (birthday cards, Christmas presents, Mother’s Day gifts, etc.) to a child’s mother and another $25 to the child’s father you can deduct the full $50. If you give gifts worth $15 to the mother and $45 to the father, you can deduct $40 ($15 plus $25).
If the children make something for their parents (decorate cards, clay figures, etc.) these are activity expenses not subject to the $25 rule.
If you gave a child clothing or paid for a child to attend a special education program or other such personal items, these would be considered gifts, subject to the $25 rule.
The same $25 per person limit applies to gifts you give to the children in your care. However, the IRS Child Care Provider Audit Guide says, “[IRS] Examiners should not confuse expenses related to activities done with the children with gifts.”
Let’s say you give a toy as a Christmas present to a child. If the toy is wrapped and the child takes it home to open it, then it’s a “gift” subject to the $25 limit. That's because only the child uses it. If the child opens the present at your home and the other children play with it, then this could be said to be an activity expense not subject to the $25 limit.
The difference between a gift and an activity expense may be a fine line. Certainly all the expenses associated with a Christmas party in your home for the children in your care are 100% deductible. Such expenses may include: party decorations, food, games, balloons, party favors, Christmas cookies and treats, etc.
When reporting these expenses on your tax return, don't use the word "Gifts" unless you are referring to gifts to parents or to items used exclusively by the child. Call everything else "Activity Expenses."
What do you do about giving gifts to children at Christmas?
Tom Copeland – www.tomcopelandblog.com
Image credit: https://pixabay.com/illustrations/gift-christmas-present-surprise-5846254/
