Giving gifts is a great way to show your appreciation for special clients during the holidays. However, when it comes to giving business gifts, things can get complicated beyond figuring out what to buy someone.
Business gifts are a tax-deductible expense but special rules do apply. The IRS states, “You can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year.” So you’re free to spend as much as you want on a client gift but can only claim up to $25 per person per year on your taxes.
Say there are two clients you enjoy working with so you send them both holiday gift baskets that cost $25 a piece. However, earlier in the year you sent another $25 gift basket to one of those clients to thank them for their business. So within the tax year, you’ve spent $25 total on gifts for Client A and $50 total on Client B. That means you can deduct $50 of the $75 spent on gift baskets that year.
The IRS specifically states that incidental expenses are not included in the $25 limit. Incidental expenses include costs like postage, insurance, engraving or gift wrapping. However, if something adds value to the gift itself, it cannot be considered an incidental expense.
You can also give a gift that qualifies as an entertainment expense and you’ll be able to deduct 50 percent of it on your taxes. For instance, you can take a client out to dinner or give them tickets to the theater or a sporting event. You’re still showing your appreciation for the client and you’ll reap a better tax benefit.
Another tax implication to consider is when giving branded marketing collateral to clients. An item is not considered a gift (and the $25 limit doesn’t apply) if it costs less than $4, has your company name and/or logo clearly imprinted on it, and is one of many identical items you give away on a regular basis.
When it comes to giving business gifts, the tax rules are clearly stated. However, applying the rules to specific situations can be difficult and is often best left to an expert.
You can make things easier for your bookkeeper and tax preparer by holding on to the receipts for gift purchases and writing any relevant details on them (like what you bought, who you bought it for and why). The explanation helps your bookkeeper properly expense the purchase and your tax preparer understand how much can be claimed.
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