As a business owner, you may find yourself giving gifts to clients and customers in the course of your business, particularly around the holidays. What a lot of people don’t realize is that the IRS only allows you to deduct part of the cost of certain gifts as a business expenses.
Dollar limitation. Basically, the IRS will let your business deduct only $25 or less for business gifts you give to any one person during your tax year. Any amount of expense in excess of $25 is disallowed as a deduction.
For example, if you give a client a $50 dollar watch as a gift, you can only deduct $25. In addition, if you and your spouse both give gifts, you're both going to be treated as one taxpayer. Consequently, the deduction both you and your spouse, together, will be able to claim is $25 per donee. This is true even if you have separate businesses, are separately employed, and each of you has an independent connection with the gift recipient.
Incidental costs. The $25 limit for business gifts doesn't include incidental costs — for example, packaging, insurance, and mailing costs, or the cost of engraving jewelry. Related costs are considered incidental only if they don't add some kind of substantial value to a gift.
For example, let's say you send someone a fruit basket as a gift. If the basket has a substantial value as compared to the value of the fruit, the cost of the basket is not incidental and it must be included in the $25 limit. On the other hand, the cost of gift wrapping is incidental and doesn't have to be included in the $25 limit.
Items excepted from the gift limitations. key chains or pens with your business name on them to customers and clients, are excepted from the $25 limit for business gifts and their cost is deductible without limitation. The main exception are for items that cost $4 or less, have your name clearly and permanently imprinted on them, and are one of a number of identical items you widely distribute.
Entertainment gifts. Maybe you have a choice between calling it a gift subject to the $25 per person per year rule or entertainment subject to the 50% rule. 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 the 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.
Taking into account the $25 limit for gifts and the 50 percent limitation on entertainment expenses, it's generally better to treat a ticket expense as entertainment when it is over $50.
For example, let's say you gave a client football tickets that cost $140. If you deduct them as a gift expense, your deduction is limited to $25. If you deduct them as an entertainment expense, your deduction is $70. Conversely, if you gave a client tickets to a movie that cost $30, you would get a bigger deduction by claiming a gift expense ($25 as opposed to $15 for an entertainment expense).
Just more rules to follow. Please email if you have any questions.
