Sometimes doing business entails making gifts to customers, clients, employees, and other business entities and associates. For numerous reasons, such gifts often make perfect business sense. Unfortunately, the tax rules limit the deduction for business gifts to a less-than-generous $25 per person per year — a limitation that hasn’t been raised in decades. When this limit was added into law back in 1962, the $25 gift deduction limit wasn’t really an issue for any but the most extravagant taxpayers. After all, the price of a first class stamp at the time was 4¢ and a 100% wool men’s suit could be had for $45 or less.
Fifty-two years later, the $25 limit is unrealistically small in many business gift-giving situations. Fortunately, there are a few exceptions to this rather restrictive limit. When one of these exceptions applies, you typically have no limit (or at least, a much higher limit) on the deduction for business gifts.
Here’s a quick rundown of the major exceptions to the $25 limit.
Gifts to a business entity vs. an individual. The $25 limit only applies to gifts directly or indirectly given to an individual. Thus, gifts given to a company for use in the business aren’t subject to the limit. For example, a gift of a $200 reference manual to a company for its employees to use while doing their jobs would be fully deductible because it’s used in the company’s business.
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.
Only direct costs are limited. The incidental costs of making a gift aren’t subject to the limit. Thus, the costs of custom engraving on jewelry and the costs of packing, insuring, and mailing a gift are deductible over and above the $25 limit for the gift itself.
Gifts to employees. Although employee gifts have their own limitations and may be treated as compensation, an employer is allowed to deduct the full cost of gifts made to employees.
Gifts vs.entertainment expenses. Entertainment expenses are normally only 50% deductible and gifts, of course, are typically 100% deductible, but only up to the first $25 of cost per donee per year. In some situations related to gifts of tickets to sporting and other events, a taxpayer may choose whether to claim the deduction as a gift or as entertainment. The gift deduction is a better deal for lower-priced tickets, but once the combined price of the gifted tickets exceeds $50, claiming them as an entertainment expense is more beneficial.
As you can see, there are several exceptions to the $25 rule, so many businesses will be able to meet at least one of them. To the extent your business qualifies for any of these exceptions, it’s important that the qualifying expenses be tracked separately (typically by charging them to a separate account in your accounting records) so that a full deduction can be claimed.
Also, to obtain any deduction for a business gift, even the miserly $25 gift deduction, you must retain documentation supporting the following: (1) the gift’s cost and a description of it, (2) the date it was acquired, (3) the business purpose of the gift, and (4) the business relationship to the taxpayer of the person receiving the gift.
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 call us so we can help you get to the right answers.