TIP FOR CLIENTS
Business Gifts – What’s Deductible?
As a business owner, you may find yourself giving gifts to clients and customers in the course of your business, particularly around the holidays. While you can deduct the cost of certain gifts as a business expense, there are substantial limitations on what you can deduct. A gift is any item that’s excludable from gross income of the recipient under the gift tax laws.
Annual dollar limit: The IRS allows your business to deduct up to $25 for business gifts you give to any one person per year. There is no limit on how many people you can give business gifts to during the year, nor on how much you spend for those gifts, although your business gift deduction is limited to $25 per recipient. That means if you give your customer a $50 gift basket, be prepared to settle for a $25 deduction. If during the course of a year, you give two gifts to a customer – one worth $20 and one worth $35 – you can only claim the maximum $25 deduction.
The $25 limit does not include incidental costs, such as packaging, gift-wrapping, engraving, or mailing costs. Costs are considered incidental if they do not add substantial value to a gift.
Direct and indirect gifts: The $25 limit for business gifts includes both direct and indirect gifts. Figuring out if you gave a direct gift is pretty straightforward. If you give a fruit basket to each of ABC Corporation’s 10 employees, then you made a direct gift to each one of them. Determining whether you made an indirect gift is trickier because, in an audit situation, the IRS will want to know who received the gift, and also who was actually intended to benefit from the gift.
Items excluded from the gift limitations: Promotional items such as key chains or pens with your business name on them that you distribute to customers, clients, and prospects are generally not considered gifts and are not subject to the $25 limit for business gifts provided they fit into one of these categories: 1) cost $4 or less, 2) have your name clearly and permanently imprinted on them, and 3) are one of a number of identical items you widely distribute.
Entertainment gifts: What happens if you give tickets to a play or sporting event to a customer or client? Is this a gift expense or an entertainment expense? The general rule is that any item that could be considered either a gift or an entertainment expense must be considered an entertainment expense. However, if you give tickets and do not attend the event yourself, you have the choice of determining whether an item is either a gift or entertainment expense. If you go with the client, you must treat the cost of the tickets as an entertainment expense – you have no choice.
Gifts to employees: Most gifts given to an employee must be included in the employee’s taxable income. However, if the gift falls under the “de minimis” fringe benefits exclusion, the gift does not need to be reported as income. To qualify for this exclusion, the gift must be of nominal value, be given infrequently, not be cash or gift card, and reporting the gift should be considered impractical. The IRS does not specifically define what is considered an item of nominal value, but it has ruled in a prior case that $100 is the acceptable threshold. Gifts noted as qualifying for de minimis fringe benefit status include holiday gifts, occasional tickets for entertainment events, and occasional snacks or drinks given to employees.
Good records: The key to claiming any deduction is keeping good records.