The year-end holiday season prompts decisions about giving to charitable organizations, customers and employees. It may seem cold-hearted to evaluate gifts in terms of the potential return on your investment, but it is simply a bad business practice to distribute wealth out of habit. Plan your giving as you do any other budget item, and use your best financial judgement to scrutinize purchases.

Why are you giving?

There are two major reasons to make charitable donations. First, you receive a tax deduction to offset a portion of profits. Second, you generate potential goodwill that enhances the public image of your company and translates into free publicity. Donating money, goods or services to a 501(c)3 organization is easy, and calculating the tax effect is fairly straightforward. Of course, the tax benefit only applies if you make a profit during that year.

On the other hand, there are varying levels of perks that accompany sizeable gifts to good causes. You might be invited to attend a resplendent gala, enjoy a local sporting event from the rarified air of a sky box, or even have a permanent plaque installed in a public facility. The latter generates name recognition for the life of the facility, and the others let you revel in your generosity.

Creating a named scholarship or endowment enhances your company’s image, as does any donation that benefits education or even your own work force. Locally, you might encourage your employees to perform community service on company time and provide tools and supplies to help them improve the local playground or install lighting at the corner park.

Rewarding customers

Regardless of whether your customers are companies or individuals, you are choosing gifts for people. If you do residential work, including energy-saving lamps or batteries, a small appliance or DVD to play in the new home theater you wired, are all reminders of the work your customer will appreciate for years. For corporate customers, a gift basket can be enjoyed by many, or logo items may remind them of your presence. A subscription or monthly gift club for the most important customers is an ongoing reminder of you throughout the year. Be careful not to generate any tax liability or violate restrictions on gifting to employees of your customers. Your accountant can advise you as to whether a gift is considered nominal or of sufficient value to create a potential problem.

If you send thank you letters or cards to customers, include a coupon for a discount on new services or upgrades, and build customer loyalty by adding a reward for referrals. If you have an open house, include useful information as well as food and beverages; for example, a handbook on electrical maintenance or looping slide show is a low-key method of educating your customers and reminding them that your company is an ongoing resource.

Recognizing employees

Gifts to employees are tricky. Most are classified as bonuses, subjecting them to income tax withholding. While bonuses earned regularly often become an expected part of the total compensation package, true gifts are, by definition, unexpected and freely offered. If gifts to employees trigger a tax effect, you may decide to increase the size of the gift to cover the tax due. However, this can trigger additional calculations that produce a never-ending spiral.

At the other end of the scale are gifts of nominal value, also known as tax-free de minimis fringe benefits. In other words, they do not trigger any tax liability for the employee. A gift qualifies as de minimis if the following apply:

• Its face value is nominal (a maximum of $100, according to the IRS Web site, www.irs.gov)

• It is infrequently given

• Its purpose is to promote health, goodwill, contentment or efficiency in employees

• It would be impractical to do administrative accounting to track it

Be wary of cash, gift cards or other items easily convertible to cash, as these are never considered to be de minimis and are always taxable as wages to your employees.

You can still treat your staff to a holiday party or offer your timeshare to a key employee and his or her family for a special reward. Knowing what your employees value helps in selecting appropriate gifts. Some may appreciate a letter of thanks, others a bonus check and still others a ham or turkey to enhance their own family celebration. Make sure to check with your accountant for guidance before you make assumptions about tax effects to either your company or your employees.

Gifts alone will not retain valuable employees or create loyalty in your customers. You still need to provide adequate compensation, motivational and supportive leadership, and a safe and healthy working environment for workers and excellent quality and service to customers. But a ham or turkey couldn’t hurt, could it? And while you’re at it, treat yourself to something nice.

NORBERG-JOHNSON is a former subcontractor and past president of two national construction associations. She may be reached at ddjohnson0336@sbcglobal.net.