Business Gift-Giving: What's Deductible and What's Not?
During the holiday season, many business owners give gifts to customers to thank them for their business. In turn, the Internal Revenue Service (IRS) offers business owners a deduction for the cost of the gifts. But before you go shopping, check your list twice because there are strict limitations on how much you can deduct, reports the Texas Society of CPAs.
THE GENERAL RULES
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 $10 and one worth $15 – you can still 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 don’t add substantial value to a gift.
If you and your spouse both give a business gift to the same recipient, for tax purposes, you are treated as one person. This is true even if you and your spouse have separate business connections with the recipient.
If you present a gift to a member of a customer’s family, the gift is generally considered to be an indirect gift to the customer. This IRS rule does not apply if you have a bona fide, independent business connection with the family member, unless it is intended for the customer’s eventual use.
PENS AND FRISBEES
Many businesses give customers and clients small promotional items such as key chains, pens, and plastic bags. Items that cost $4 or less, have your company name clearly and permanently imprinted on them, and are widely distributed may be deducted without limitation.
GIFT OR ENTERTAINMENT EXPENSE?
What happens when you give a client or customer tickets to the theatre or a sporting event? If you go to the event with the person, the rule is that you must treat the cost as an entertainment expense, subject to the entertainment expense rules. In that case, the $25 limitation doesn’t apply. However, as an entertainment expense, you may deduct only 50 percent of the cost.
If you give the tickets and do not attend the event yourself, you can choose whether to declare the tickets a gift, subject to the $25 limitation, or entertainment expense. In this case, you should make the decision based on which is more advantageous.
For instance, suppose you gave a client two $75 tickets to a football game for his or her personal use. If you treat those tickets as an entertainment expense, you may deduct $75 (50 percent of $150). Treating those tickets as a gift would limit your deduction to $25.
GOOD RECORDS: THE KEY TO CLAIMING DEDUCTIONS
CPAs say it’s important to keep accurate records of all business gift expenses, since this is an area that the IRS closely monitors. Be sure to record the date, name of the business associate, and the cost of the gift, and hold onto receipts to substantiate your deduction. A CPA can answer any questions you have about business gift deductions.
Reviewed and edited by Jim Oliver, CPA, Jim Oliver & Associates P.C.
Copyright 2006, American Institute of Certified Public Accountants