From a certificate for a getaway weekend to a flat-screen TV, rewards are used by companies all the time as part of their incentive programs. The tax treatment of incentives—i.e., whether the cost can be deducted by donors and whether the value must be reported as income by the recipient—often depends on two things: whether the recipient is an individual or a company, and the value of the reward.
The cost of providing incentives is almost always deductible by the provider as what the IRS calls an “ordinary and necessary” business expense—that is, unless the agency believes that the cost of the incentive is too lavish, a term that is frequently measured by the value of the award compared to the business benefit provided by the customer, supplier, or employee.
For example, providing a $5,000 cruise to a company that purchased $500 worth of supplies or equipment in the last year might be deemed over the top by the IRS and unrelated to the benefit received. The penalty would be disallowance of the deduction.
If the IRS thinks the award is for something other than furthering the donor’s business interests, it could treat the award as a gift and limit the giver to a deduction of $75 per recipient. In that case, the recipient does not have to report the award as income.
It Can Get Tricky
Tax law states that if an individual employee receives tangible personal property (other than cash, a gift certificate, or an equivalent item) as an award for length of service or safety achievement—but not sales performance—the cost of the award is still deductible to the donor but the award does not have to be included in the recipient’s income if limited to $1,600 in a single year. As with most tax law provisions, there are exceptions and conditions, so companies providing such awards should check with counsel. If taxable, the donor must include the cost of the award on the recipient’s year-end W-2 form.
A more common reward is a trip given to a company or individual for meeting sales, purchasing, and/or productivity goals. Again, subject to IRS rules prohibiting the deduction of lavish expenses, the cost of the trip is generally deductible to the donor organization as an “ordinary and necessary” business expense.
The rules on taxability of trips to the recipients are somewhat tricky. According to most accountants, if the trip is given to a company, it does not have to treat the value as taxable income. But if the trip is given to an individual, the donor organization must provide that individual with a Form W-2 or 1099 (depending on whether he or she is an employee) showing the value—not the cost—of the trip being given.
If an employee of the donor company accompanies recipients on an incentive trip, their involvement is generally treated as a business expense, deductible to the donor and nontaxable to the recipient. If a spouse accompanies the employee on the incentive trip, IRS rules generally require that the cost of spouse travel be treated as income to the spouse (or employee) unless the spouse is an active employee of the business providing the award or incentive travel.
As indicated, tax issues surrounding incentive trips and awards can be complicated, so it’s always a good idea to get legal and/or accounting advice before structuring such a program.
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