Q: I work for a large company that will be hosting a convention. The gifts that will be given to convention attendees (all employees) exceed $600 in costs. Does the company need to cut a 1099-MISC for these gifts?
Anthony
A: The first thing to say is that this comes under a gray area, since this expenditure could either be considered an "ordinary and necessary business expense" or a "fringe benefit," depending on the circumstances. Let's delve into each to see how things end up...
For more information on this, see IRS Publication 525, Taxable and Non-Taxable Income. Also see IRS Publication 15B, Fringe Benefits. I've also done a posting on fringe benefits.
Option A: "Ordinary and Necessary Business Expense"
Under IRC 162, all "ordinary and necessary" business expenses are deductible to a business, and generally excluded from the beneficiary's income. These things typically include no-brainers like cab fare, reimbursed meals, etc. When it comes to the value of convention costs, the facts and circumstances would have to demonstrate that this was much more of a business trip, and much less a personal reward. If things like gifts are involved, it's awfully hard to justify those as "ordinary and necessary expenses."
Option B: Fringe Benefit
What seems to fit much more securely here is to treat the gift (as opposed to the travel and lodging of the convention, which should be ordinary and necessary) as a fringe benefit. Fringe benefits are non-wage sources of compensation to employees. As a general rule, they are considered as wages for tax purposes (deductible to the employer, taxable to the employee).
There are a baker's dozen or so of tax-free fringe benefits, which can be found in handy Pub 15B. Is there any tax-free fringe haven that these business gifts would fit under?
It could be an "achievement award," but these tend to be limited, hard to qualify for, and excluded to highly-compensated employees (those making more than $100,000). So, this is probably out.
It could be a "de minimis" benefit (which is defined as something so small that accounting for it would be unreasonable). However, $600 or more dollars per employee doesn't seem all that small to me.
Conclusion
If I were advising on it, I would suggest that the company add it to people's W-2 income as a bonus. In practice, most companies will simply write it off and forget it.
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