Nora Tellifson, CPA •
Since the holiday season is almost upon us, it’s a good time to discuss the rules surrounding business gifts. Gifts to clients, employees, vendors, prospects and other business partners are legitimate business deductions within certain parameters. First of all, the tax deduction is limited to $25 total per person per year. So if you give your largest, best customer a $200 bottle of scotch, he or she will appreciate it very much, but you can only deduct $25. If you give the same $200 bottle of scotch to the ten office workers in your best client’s office to share, it works out to $20 per person, and you can deduct $200. However, those office workers aren’t going to get much work done after that, which would not be appreciated by your best client so consider a fruit basket or cookies instead!
Since the holiday season is almost upon us, it’s a good time to discuss the rules surrounding business gifts. Gifts to clients, employees, vendors, prospects and other business partners are legitimate business deductions within certain parameters. First of all, the tax deduction is limited to $25 total per person per year. So if you give your largest, best customer a $200 bottle of scotch, he or she will appreciate it very much, but you can only deduct $25. If you give the same $200 bottle of scotch to the ten office workers in your best client’s office to share, it works out to $20 per person, and you can deduct $200. However, those office workers aren’t going to get much work done after that, which would not be appreciated by your best client so consider a fruit basket or cookies instead!
The $25 limit per person applies to the total annual gift amount. If you give your client a birthday gift as well as a holiday gift, the total deduction is limited to $25. Additionally, a gift to the client’s family is considered to be an indirect gift to the client, and that gift to the family must be considered in the $25 annual limit to that client. You and your spouse together are also limited to $25 annually per person. For example, let’s assume both you and your spouse have separate businesses, but you share a mutual client, Client X. If you give Client X a $25 gift that you deduct as a business expense, your spouse cannot give Client X any deductible gifts because you have already deducted the maximum $25 that both of you are limited to for the same person. Similarly, if your business is a partnership with multiple partners, the entire partnership is limited to the $25 deduction limit per client. Basically, the business entity is considered as a single taxpayer for purposes of considering the $25 gift deduction limit.
Besides the limitation on the deductible amount of the gift, there are some other requirements for business gifts to be deductible. There must also be a business benefit gained, or expected to be gained, by giving the gift. Your records need to include the cost of the gift, date the gift was given, description of the gift, business reason, and the occupation, name, or other information about the recipient that demonstrates a business relationship. These recordkeeping requirements are necessary, or the deduction could be thrown out in the case of an audit.
Certain gifts are not subject to the $25 annual limit. Items that cost $4 or less, have your business name imprinted on them, and are widely distributed by you are not subject to the limit and are fully deductible. For example, pens or coffee mugs that meet those criteria are not considered to be business gifts subject to the annual limit. Awards of personal property given to an employee for length of service or safety achievement are also an exception and are deductible up to $400 annually per employee.
Sometimes entertainment costs can be considered a gift. If you attend the event with the client, it will be considered an entertainment expense, subject to the requirements surrounding entertainment deductions, and subject to the 50% limit. (Refer to my 2/1/16 article for more information on entertainment deductions)
However, if you give a client tickets to an event and do not accompany them, you may treat the expense as a gift expense or an entertainment expense, whichever is most advantageous. For example, if you give your client two $75 tickets (total cost $150) to a ball game that you do not attend, you could deduct a $25 gift expense or a $75 (50% x $150) entertainment expense. Obviously, in that case, treating the tickets as an entertainment expense is more advantageous and results in the larger deduction.
It is up to the business owner to know and comply with the limits on business gifts and to maintain the required substantiation. I want to emphasize that this discussion of business gifts has no bearing on individual gift giving. That is another excellent subject to consider at year end, and we will discuss it soon in an upcoming article. As always, if you have questions, consult your accountant, and in all this discussion of business gifts, don’t forget your hardworking accountant!
Besides the limitation on the deductible amount of the gift, there are some other requirements for business gifts to be deductible. There must also be a business benefit gained, or expected to be gained, by giving the gift. Your records need to include the cost of the gift, date the gift was given, description of the gift, business reason, and the occupation, name, or other information about the recipient that demonstrates a business relationship. These recordkeeping requirements are necessary, or the deduction could be thrown out in the case of an audit.
Certain gifts are not subject to the $25 annual limit. Items that cost $4 or less, have your business name imprinted on them, and are widely distributed by you are not subject to the limit and are fully deductible. For example, pens or coffee mugs that meet those criteria are not considered to be business gifts subject to the annual limit. Awards of personal property given to an employee for length of service or safety achievement are also an exception and are deductible up to $400 annually per employee.
Sometimes entertainment costs can be considered a gift. If you attend the event with the client, it will be considered an entertainment expense, subject to the requirements surrounding entertainment deductions, and subject to the 50% limit. (Refer to my 2/1/16 article for more information on entertainment deductions)
However, if you give a client tickets to an event and do not accompany them, you may treat the expense as a gift expense or an entertainment expense, whichever is most advantageous. For example, if you give your client two $75 tickets (total cost $150) to a ball game that you do not attend, you could deduct a $25 gift expense or a $75 (50% x $150) entertainment expense. Obviously, in that case, treating the tickets as an entertainment expense is more advantageous and results in the larger deduction.
It is up to the business owner to know and comply with the limits on business gifts and to maintain the required substantiation. I want to emphasize that this discussion of business gifts has no bearing on individual gift giving. That is another excellent subject to consider at year end, and we will discuss it soon in an upcoming article. As always, if you have questions, consult your accountant, and in all this discussion of business gifts, don’t forget your hardworking accountant!
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