In general, any payment, whether called a gift or not, to an employee is taxable income to the employee.

Gifts of nominal value, such as a holiday turkey, are treated as de minimis fringe benefits. A gift to an employee is de minimis if the value is nominal, accounting for the item would be administratively impractical, the gift is provided infrequently, and the gift is made for the purpose of promoting health or goodwill to the employees. There is no set dollar limit, but in one particular instance a gift with a value over $100 was treated as taxable income. A de minimis employee gift is deductible as a non-wage business expense by the employer.

Regulations give these examples of gifts that qualify for de minimis treatment: birthday or holiday gifts of property (not cash) with a "low fair market value", gifts such as books or flowers under special circumstances (e.g., outstanding performance), traditional awards (such as a gold watch) upon retirement after lengthy service for an employer, and an occasional cocktail party, group meal or picnic for employees and their guests, or occasionally giving out theater or sporting event tickets.

If you give your employees cash, gift certificates or other similar items that can be converted to cash, the value of these gifts is considered additional wages or salary, regardless of the amount.

Reasonable costs of giving a holiday party for employees are fully deductible. There is no requirement to discuss business before, during, or after the event. To be fully deductible, the party must be primarily for the benefit of employees and not limited only to top executives.

When a business makes gifts to others, whether they be customers, vendors, or referral sources, other rules apply. A business may deduct up to $25 in gifts given to each recipient during any given year. Items clearly of an advertising nature such as promotional items do not count as long as the item costs $4 or less. Many companies give things like pens, frisbees, and key chains under this rule. Incidental expenses for the costs of engraving, wrapping, and mailing the gifts are also allowed as a deduction. A husband and wife are considered to be one taxpayer, so only $25 in total gifts to the two of them can be deducted.

The limit is not on the value of the gift that can be given. The limit is on how much of the cost of the gift the business can deduct. You may give a client a gift worth $100 – but you may only deduct $25.

What if you give your clients tickets to a concert or a football game? Is it a gift, or is it entertainment? If it’s a gift, only $25 is deductible. If it’s entertainment, 50% of the cost is deductible.

If you give a customer tickets to a theater performance or sporting event and you do not go with the customer to the performance or event, the IRS gives you a choice. You can treat the cost of the tickets as either a gift expense or an entertainment expense, whichever is to your advantage

If you go to the event with the client, then it’s a business entertainment expense. That means no $25 limit, but you only get to deduct 50% of the total cost. You must treat the cost of the tickets as an entertainment expense. You cannot choose, in this case, to treat the cost of the tickets as a gift expense.

If you give a customer packaged food or beverages that you intend the customer to use at a later date, it is treated as a gift.

Keep accurate records of all business gift expenses, recording the date, the name of the business associate, and the cost of the gift. Make sure you can show receipts.