The holiday giving season is here, and the news stories about pay-to-play corruption and uncertainty surrounding how tax law changes will affect business deductions have made the process an ethical slippery slope.
Gift or bribe?
Advice about the benefits and pitfalls of giving and accepting business gifts ranges from “zero tolerance” to “do whatever you want regardless of what the experts say,” so consult with your CPA and legal counsel to ensure you know the rules for giving gifts to employees, vendors and clients.
Can you take your school board official to lunch, or should you split the bill? You can give a logo pen to your senator, but a designer leather briefcase would not be appropriate. If you are a government contractor, any perception of influence is unwise, so those skybox tickets to the game might be a bad idea.
The same issues arise with vendors and clients. A gift is a gesture of goodwill, but the associated principle of reciprocity is tricky. There is a thin line between a token of appreciation and an implied quid pro quo or kickback, and timing is critical. Is it unethical for an employee to send a “thank you” gift to a project manager a week before that company awards your company a large project? Every gift creates pressure to respond in kind, no matter how innocuous the intent.
Embezzlers may be involved in kickback or ghost vendor schemes. Some company executives have pressured vendors to send expensive gifts to their home addresses, while directing less valuable corporate gifts to the business location. Conflict-of-interest policies may not be sufficiently broad to address these activities.
A gift to a loyal customer after years of business deals is a better tactic. So is a charitable contribution in the name of a client or employee. Timing can clarify the distinction between gift and bribe. Value is also a factor, but even inexpensive gifts can positively influence the recipient.
Be careful when accepting gifts, too. Employee gifts to managers can create attempts to curry favor by competing to give the best gift. Instead, employees can chip in a modest amount ($15–20) to purchase a single group gift for their manager.
Large companies such as Kmart and Wheeling-Pittsburgh Steel have had “no gift” policies for more than two decades. Small businesses also should formalize their expectations and disclosure procedures. Some companies accept corporate gifts and hold a lottery to award them to employees. Others require employees to sign formal agreements acknowledging gift policies. Edible Arrangements even requires its clients to sign a contract agreeing to the policy, which includes a $50 value limit.
The etiquette governing corporate gifts varies globally. In Japan, for example, gifts are expected in business dealings. The level of corruption in many countries blurs the line between a thank-you gift and a bribe.
The Foreign Corrupt Practices Act of 1977 makes it unlawful to bribe foreign government officials to obtain an “improper advantage” in doing business inside and outside of the United States. The act also contains provisions requiring transparency in accounting.
Transparency International, a global anticorruption coalition, publishes an index rating corruption levels for 176 countries. Denmark and New Zealand are tied for least corrupt; at the other end of the spectrum are Syria, North Korea, South Sudan and Somalia. The United States is rated No. 18. Is that good enough on the ethics scale?
The Internal Revenue Service has, in past years, allowed a deduction up to $75 for a business gift. Employees may receive gifts valued at less than $25, but anything more than that is considered taxable income. Food, coupons and small work-related items such as pen sets are OK, as are tickets to sports or entertainment events. (An etiquette expert from The Emily Post Institute also suggests that managers give the same gift to all employees as a way to avoid the perception of playing favorites.) So, the annual ham or turkey my family’s subcontracting business provided to our employees was a token that caused no accounting problems.
If you decide to award large bonuses, or sell the company and split the proceeds with your loyal employees, they also face some potential tax effects. A bonus or expensive gift imputed as income may move an employee into a higher tax bracket. Will the company cover the taxes on the gift itself, leaving the employee with an additional tax payment? What did Oprah do about those cars and computers she awarded to her audience members? Read the New York Post article, “No Thanks, Oprah, You Can Keep the New Car” (http://nyp.st/2j49Zro). You may choose hams and turkeys instead.