The holiday season is upon us, and many businesses take this opportunity to express gratitude to their employees and customers through thoughtful gifts. Not only is this a wonderful way to say "thank you" and strengthen relationships, but it can also offer a potential deduction on your tax return. As you spread the holiday cheer, here are some things to keep in mind as we approach tax season.
What is a business gift?
The IRS defines a business gift as any gift given “in the course of your trade or business.” Depending on the type of gift and its recipient, you might be eligible for a tax deduction. However, the rules for deducting business gifts are specific, so knowing the details can help you make informed decisions and maximize your benefits.
Tangible Gifts
Physical items, such as a gift basket with food and beverages, are typically tax deductible as a business gift.
Cash and Gift Cards
Cash and gift cards are considered income to the recipient and cannot be deducted as a gift.
Entertainment
Gifts that could be classified as entertainment, such as tickets to a sporting event or concert, are treated as entertainment expenses and are not deductible.
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 additional expense associated with a gift that does not significantly increase its value, such as engraving, packaging, or shipping. These costs are separate from the gift's primary cost and are not subject to the $25 deduction limit.
For instance, if you bought a journal for $40, paid $10 to have the recipient's name engraved, and spent $15 on packaging and shipping, you could deduct a total of $50. This includes $25 for the journal (the maximum allowable deduction), plus $10 for engraving, and $15 for packaging and shipping.
Gifts to a married couple
If you give a gift to a married couple, the $25 deduction limit applies to them as a pair, even if your business relationship with each person is different.
For example, if one spouse is your employee and the other is one of your vendors, you can still only deduct up to $25 for gifts given to both of them combined.
Promotional gifts
If the value of an item is less than $4, has your business name permanently branded on it, and is widely available and distributed, 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 for informational purposes only and should not be taken as legal, business, or tax advice. Please consult your accountant or bookkeeper for more information based on your situation. For more information, please read through the following IRS resources: