TIps to rental-property cleaning service workers deductible?

Large residence on university campus, half occupied by owners ("empty nester" couple), half converted to rental units for grad students or visiting fellows. Small but licensed cleaning firm provides weekly cleaning services to entire residence; 40% of the cost is taken as deductible expense against the rental income, based on pro rata square footage of rental area,

Can similar fraction of tips/gifts given to cleaning service personnel at Christmas time be included in this deduction?

Reply to
AES
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"AES" wrote

You mean allocated to the rental activity? Yes, I'd take it like that.

Reply to
paulthomascpa

Assuming tipping is a common practice, then yes to tips. Gifts are limited to $25 per person.

Reply to
Alan

...per year (for completeness).

Reply to
D. Stussy

Is it the gift that is limited to $25, or the amount that can be deducted? If half of OP's expenses are deductible, can he give $50 and deduct half? Or is he limited to a deduction of $12.50?

Reply to
Stuart A. Bronstein

Individual "gifts" are limited to $25 per person per year. Give a client $30 and you only get a $25 deduction. Entertainment expenses have no limit but are subject to the 50% deduction rule. Some gifts can be considered entertatinment. E.g., tickets to a baseball game or broadway show. If under $50 bucks, treat as a gift. If over $50, treat as entertainment.

Reply to
Alan

The so-called $25 limit on business gifts refers to NON-CASH items that the business giver can deduct as a business expense even though the recipient does not have to recognize taxable income. Cash payments, such as tips, can be off any amount. Such cash payments are taxable income to the recipient.

Again, tips are income to the recipient. Tips which are business related are fully deductible. The fraction of the OP's Christmas tip to the cleaners which is properly allocated to the rental activity is deductible on Schedule E.

Reply to
Bill Brown

I see nothing in Section 274 or its regulation that says the $25 limitation refers to tangible property only. Cash may be given as a gift. Not all cash gifts are tips.

Reply to
Alan

"Alan" wrote

If a business gives cash to it's employees it's fully includable in income on the employees W-2. For a contract worker I'd include the cash amount in their 1099 and fully deduct it as the cost of the goods or services received.

I don't see tips as a gift. I know the IRS is going to treat the tip as income to the service provider. It's income and fully taxable. No question. And they'll fight tooth and nail to hold that it's a taxable tip and not a non-taxable gift.

Reply to
paulthomascpa

You are correct. I was thinking about exceptions to IRC Section 102(c) (1).

IRC Section 274 does refer to Section 102.

274(b)(1) Limitation.? No deduction shall be allowed under section 162 or section 212 for any expense for gifts made directly or indirectly to any individual to the extent that such expense, when added to prior expenses of the taxpayer for gifts made to such individual during the same taxable year, exceeds $25. For purposes of this section, the term ?gift? means any item excludable from gross income of the recipient under section 102 which is not excludable from his gross income under any other provision of this chapter, but such term does not include?

102(c) Employee Gifts.?

102(c)(1) In general.? Subsection (a) shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee.

The exceptions are for things like service and safety awards which must be tangible personal property. As Paul Thomas and I noted, tips are income to the recipient.

Reply to
Bill Brown

Let's make sure we are not talking past each other. To take a business deduction for an expense it must be ordinary and necessary. One of the requirements of that rule is that it be a customary practice. If you hire someone to clean your rental properties and it is a customary practice to tip the workers, then the tip is a business deduction and is income to the recipient. If at around Christmas time, you give a gift of $25 to the worker who cleaned your rental property, that is a business gift deduction to the business and not income to the recipient. If you elect to take the owner of the cleaning company to a ball game and spend $100 for the owner's tickets and refreshments, that's entertainment and $50 is deductible.

Reply to
Alan

The deduction for entertainment expenses are not allowed if extravagant. From publication 463, chapter 2, "You cannot deduct expenses that are lavish or extravagant under the circumstances.". If you pay $3000 for front-row seats (for yourself and the client) but your business revenue is only like $50,000, then that is likely lavish. But if your business revenue is $1,000,000, then it might be OK.

Also I don't agree with your statement "If under $50 bucks, treat as a gift. If over $50, treat as entertainment." If the expense was $25 and it was entertainment (say you took your client out for sodas :), then it has to be deductible as entertainment, so $12.50 is deductible. If you give a cash gift or giftcard of $80, then it's a gift and only $25 is deductible. The remaining $55 will show up for example on 1120-S K-1 line 16C or similar place.

If you give a gift of $25 to each of your employees, that could be construed as as income (deductible by you and taxable to the employee). However, maybe section 125 exempts it somehow.

If you give a gift of $25 to contractors who work for you, such as the cleaning people, then it's the same as the above (or ought to be).

Reply to
removeps-groups

Cash payments by a business to an employee are taxable income to the employee no matter the dollar amount and no matter what the employer calls those payments.

The above is irrelevant to your question. 40% of the cash payment tips/ Christmas gifts/whateveryoucallthem are deductible by you as a rental expense. Since the payments are taxable income to the recipients, there is no specific limit on the deductible dollar amount you can give (although all those non-specific limits like "ordinary and necessary" still apply).

Reply to
Bill Brown

The law is pretty clear on this issue. If you attend an event with the client.. it is entertainment expense. If you give the tickets to the event to the client and you do not attend, you have a choice: Entertainment or a gift. That is why I provided the rule of under $50 treat as a gift; over $50 treat as entertainment.

All of my replies deal with the rules relating to clients or contractors you hire in the course of your business. Gifts to employees are covered under Section 132(e)(1) (the de minimis fringe benefit), its regulation and various rulings. I don't have them handy, but I do remember that if you give an employee cash, gift cards, debit cards, gift certificates, or any item that is readily convertible to cash, the cash or value of the gift is considered as taxable compensation. A gift of flowers or a food basket, mugs, t-shirts or the like would be de minimis.

No it is not. It is the exception to the general rule. Gifts of $25 or less to a contractor you hire in the course of your business are deductible as a business gift and are not taxable income to the recipient as they are treated as "gifts" by the recipient.

Reply to
Alan

If given to an employee, it's not a gift but compensation.

The section involved is with regard to gifts given in the course of business.

That's because a "tip" is compensation for [good] service.

Reply to
D. Stussy

It's the [annual] deduction [per recipient] that is limited - IRC 274(b).

Reply to
D. Stussy

Thanks for that. So I imagine that means that if someone makes a $50 gift that is considered half business and half personal, he can deduct $25 instead of being limited to $12.50.

Reply to
Stuart A. Bronstein

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