During the holiday season, many businesses choose to give gifts to clients, employees, and partners to express appreciation. While gift-giving is a thoughtful gesture, it’s important for business owners to understand the tax implications. The IRS allows businesses to deduct certain gift expenses, but there are specific rules and limitations to follow.
The $25 Limit on Business Gifts
The IRS allows businesses to deduct gifts given to clients and customers, but with a key limitation: the deduction is capped at $25 per person per year. This applies to gifts given directly or indirectly to each individual. Understanding how to navigate this limit is essential to maximizing deductions while staying compliant with tax regulations.
Important Exceptions to the $25 Rule
While the $25 limit may seem restrictive, there are a few key exceptions that can help businesses expand their deductions:
- Gifts to Business Entities: The $25 limit applies only to gifts given to individuals. Gifts to business entities, such as companies or organizations, are not subject to this limit, provided the gifts are for business use.
- Gifts to Married Couples: If a business is gifting to both spouses who are clients or customers, the deduction limit can increase. In this case, each spouse is treated separately for tax purposes, allowing a combined deduction limit of $50 for both individuals. This is only applicable when the business has a relationship with both spouses in a business context.
- Incidental Costs: Expenses such as engraving, packing, shipping, or insurance costs related to a gift are not included in the $25 limit, as long as they don’t add substantial value to the gift itself. These additional costs can be deducted separately.
Employee Gifts and Tax Implications
Gift-giving to employees differs from gifts to clients and customers in several ways:
- Non-Cash Gifts: Non-cash gifts to employees are generally deductible as a business expense. However, cash or gift card gifts are treated as taxable compensation and must be reported as income.
- Value Limits: If the value of a non-cash gift exceeds $100, it may be considered taxable compensation, and businesses may need to report it on employee tax forms.
Additional Guidelines for Gift Deductions
- Promotional Items: Gifts costing $4 or less with your business name permanently engraved and distributed regularly are not subject to the $25 limit.
- Gifts vs. Entertainment: If a gift could be considered either a gift or an entertainment expense (such as tickets to events), it is treated as entertainment and cannot be deducted as a gift. Entertainment expenses are typically only 50% deductible.
- Record-Keeping: Businesses must document the description, cost, date, business purpose, and relationship to the recipient for all gifts. Proper record-keeping is essential for substantiating deductions in case of an IRS audit.
Takeaways for Your Business
There are several opportunities for businesses to maximize their gift-related deductions. Gifts to business entities, married couples, employees, and certain incidental expenses provide ways to reduce taxable income. By maintaining accurate records and understanding IRS guidelines, businesses can make the most of their gift-giving strategy while minimizing tax liability.
If you have specific questions or need assistance, contact Lakeesha V. Browne, CPA. Send your questions here or schedule a free consultation today!
