Business Gift Giving – What’s Deductible?

During the holiday season many business owners give gifts to their clients, prospective clients or employees to thank them for their business or show appreciation for their hard work.   

But did you know your deduction for that business gift is limited to $25? 

The basic rule is that if you give someone a gift for business purposes, your business expense deduction is limited to $25 per person per year.  Any amount over the $25 limit is not deductible.  If this amount seems low, it is.  That’s because it was established in 1954.   

Most taxpayers are at least vaguely aware of this tax rule.  But what isn’t as widely known is that there are a few exceptions and work-arounds to this rather restrictive limit.   

Here’s a quick rundown of the major exceptions to the $25 limit. 

Companywide gifts 

The $25 limit applies only to gifts to individuals, either directly or indirectly.   It doesn’t apply if you gift to an entire company, unless the gift is intended for a particular person or group of people within the company such as the president or manager.  Such companywide gifts are deductible in any amount as long as they are reasonable. 

Example:  

Jackson, is a residential custom home builder whose best client is Acme Brick. Just before Christmas, he drops off a $100 cheese basket at the company's reception area for all of Acme's employees. He also delivers an identical basket to Acme's president. The first basket left in the reception area is a companywide gift, not subject to the $25 limit. The basket for Acme's president is a personal gift and therefore is subject to the limit.

Gifts to a husband and wife 

If you have a business connection with both spouses and the gift is for both of them, the $25 limit doubles to $50. 

Gifts to employees 

Although they have their own limitations and may be treated as compensation to the employees, an employer is allowed to deduct the costs of gifts made to employees. 

Entertainment 

There is a special twist if you gift a client with entertainment tickets, such as tickets to a football game. If you don't attend the event with the client, you have the option of treating the tickets as a gift or as an entertainment expense. Gifts of up to $25 are 100 percent deductible, while entertainment expenses are only 50 percent deductible. So, with tickets that cost less than $50, you get a bigger deduction if you treat them as a gift. If they cost more, treat them as an entertainment expense. 

Example: 

You pay $400 to a scalper for a pro football game ticket that has a face value of only $100. You give the ticket to a client but don't attend the game yourself. If you treat the ticket as a gift, you may deduct only $25 of the expense. If you treat it as an entertainment expense, your deduction would be 50 percent of $400, or $200. 

Only direct costs are limited 

Incidental costs, such as engraving on jewelry, or packaging, insuring, and mailing, are generally not included in determining the cost of a gift for purposes of the $25 limit 

Inexpensive gifts 

Inexpensive items such as key chains and pens are not considered gifts for purposes of the $25 limit so long as:

• they cost $4 or less a piece
• your company name is clearly and permanently imprinted on them, and
• they are one of a number of identical items you widely distribute

As you can see, there are several exceptions to the $25 rule. With careful planning your business gifts could be 100% deductible.  To the extent your business qualifies for any of them, it’s important that the qualifying expenses be tracked separately (typically by charging them to a separate account in your accounting records) so that you can claim a full deduction. 

If you have any questions regarding the types of gifts or gift-giving situations that may qualify for a full deduction or how to properly isolate and account for them in your records, please contact me at Kinzey & Arndt CPA.  J