That’s right, Uncle Sam actually allows businesses to deduct business gifts to customers and clients, BUT there are rules and limitations. Especially in this economy, businesses are in serious competition with one another for the clients and potential clients out there, and giving gifts to woo those customers and clients is a time-tested method that can truly give a business an edge over its competitors. The IRS does NOT give businesses carte blanche, though on what or how expensive a gift may be, and to whom it can be given.
In general, a business can deduct up to $25 annually for business gifts that are given directly or indirectly to any single person. Now this $25 limit doesn’t include incidental costs, such as engraving, embroidery, or some sort of embellishment on the gift that doesn’t significantly increase the value of the gift. It also doesn’t include packaging, insuring, or mailing of the gift, again, as long as they don’t add substantially to the value of that gift. Gift-wrapping, for example, is typically considered to be an incidental cost. If, however, you put the gift into a basket, box, or other such container that is substantial compared to the value of the gift, the item may not be considered incidental and the amount of the gift in excess of $25 would not be deductible.
Now don’t think you can outfox the IRS if you give a $25 gift and your spouse gives a $25 gift to the same person or business and have both be deductible. In this situation, the IRS treats you and your spouse as a single taxpayer and there is a $25 TOTAL deduction limit for gifts to a single recipient. This is the case, REGARDLESS of whether or not you and your spouse own separate businesses, are employed by completely different employers, or even if you each have a separate and independent connection with the recipient.
But the IRS also makes some exceptions for gifts that are not subject to the $25 gift limit. One exception is if that gift costs $4 or less. A second is if the gift has your or your business’ name or logo permanently imprinted on the gift. In addition, if the gift is one of many identical items that are widely distributed such as pens, coffee mugs, calendars, etc., it is an exception to the $25 maximum gift rule.
Finally, if your gift is a sign, display, or other promotional material that will be used and/or displayed on the business premises of the recipient, then it also is an exception to the $25 gift rule.
When it comes to gifting rules, one of the questions I get asked most frequently is whether or not giving a client or customer tickets to an entertainment or sporting event is considered a gift, and subject to the $25 deduction limits, or an entertainment expense, and subject to the 50% deductibility rule for entertainment expenses. Well, here comes my lawyer answer, it depends. In general, any item that might be considered EITHER a gift or an entertainment expense will be considered by the IRS to be a gift and subject to the $25 limitation
Now there is an option. If your business gives a gift to a client of tickets to an event and no one from your business attends the event, you have the option of choosing whether you want to classify it as a gift or entertainment expense. This choice should really be a mathematical one. Do the math and decide whether or not you get the better deduction by taking a flat $25 gift deduction, or if the 50% of the total cost would be a better deal for you.
Remember, that if you or someone from your business attends the event, this is a moot point and it MUST be treated as an entertainment expense and is subject to the 50% deductibility rule.
Giving gifts at this, or any other time of year is a fun and rewarding experience for the gift givers and the recipients. If you can deduct all or part of that gift as well… then it just makes for an even happier holidays come tax time! Who doesn’t like to give a gift that gives right back to you? This is just one of the MANY, MANY ways that you can learn to keep more of your hard-earned money where it belongs, in your POCKET!