The holiday season is here and many businesses choose to give their employees and customers gifts. It's a great way to say thank you and show your appreciation — and it can also give you a deduction on your tax return! As you spread the holiday cheer, here are some things to keep in mind as we go into the next tax season.
What is a business gift?
If you give a gift "in the course of your trade or business," then the IRS considers it a business gift. Depending on what the gift is and who receives it, you may be eligible for a business gift tax deduction.
Tangible Gifts
Tangible gifts, such as a gift basket with food and beverages, are typically tax deductible. This may be given as a direct gift to your customer or employee, or it can be an indirect gift intended for the recipient and their family.
Cash and Gift Cards
Cash and gift cards are treated as income and cannot be deducted as a gift.
Entertainment
Gifts that may be considered entertainment, such as tickets to a sporting event, are generally considered as an entertainment expense and cannot be deducted.
Deducting business gifts
You can deduct up to $25 for business gifts per person, per year. However, there are a few caveats to this:
Incidental costs
An incidental cost is an addition to the gift that does not add substantial value, such as engraving, packaging, and shipping. These costs are not included as part of the cost of the gift and are not limited to the $25 deduction.
For example, if you purchased a journal for $40, had the customer's name engraved for $10, and paid $15 for packaging and shipping, then you could deduct a total of $50 ($25 for the journal + $10 for the engraving + $15 for packaging and shipping.)
Gifts to a married couple
If you give a gift to a married couple, a $25 limit is applied for both of them combined, even if the business relationship is different. For example, if you have an employee whose spouse is one of your vendors, you can only deduct up to $25 for gifts given to them.
Promotional gifts
If the value of an item is less than $4, has your business name permanently branded on it, and is a product that is widely available and distributed, then it is considered a promotional and marketing expense, which has different rules for tax deductions. This may include pens, notepads, lanyards, etc.
Recordkeeping for business gifts
If you plan on taking a tax deduction for your business gifts, you must keep complete and accurate records about the purpose of the gift and the details of the amount spent. Here is what you should document:
The cost of the gift
A description of the gift
The purpose of the gift
The recipient and the business relationship
The date the gift was purchased
Categorizing transactions can get tricky, especially if you plan on taking a deduction for them. If you're unsure about a transaction, it's best to consult an accountant or bookkeeper. If you're in need of a bookkeeper, give us a call at (360) 756-5020 to see how we can help!
Disclaimer: This post is meant for informational purposes only and should not be taken as legal, business, or tax advice. Please consult with your accountant or bookkeeper for more information based on your specific situation. For more information, please read through the following IRS resources: