In your business, you may like to give gifts to clients and even those that refer new clients to you and maybe even your own employees.
I see this happen regularly.
But the question then becomes, how does this affect my tax deductions? How much can I deduct?
According to the IRS, you can deduct up to $25 per person per year for the gifts you purchase them. Yeah, it’s kinda a tricky business here.
How do you define a business gift?
Gifts can be classified as different types of things besides just gifts.
Are you giving a gift card or a physical gift? Or are you giving them some form of entertainment or a meal at a restaurant?
They are looked at differently.
Physical gifts and gift cards and cash are always going to be gifts and subject to the $25 limit.
But you could give your employees or contractors an extra payment for their services and that would count toward your contractor/employee expenses, not gifts.
Or you could take your client to a restaurant or sporting event, therefore it counts as entertainment, instead of a gift. There are some restrictions though if you don’t go along to enjoy the entertainment (i.e. still a gift).
Some exceptions to the rule
Of course, there are some exceptions to the rule of costs of gifts.
The shipping, packing and gift wrapping do not count towards the $25, unless they significantly add to the value of the gift.
For example, if you were to wrap the gift in gold plating, that would significantly add to the value of the gift and therefore count towards the $25.
If the gift you are giving costs less than $4 and meets the following requirements:
Has your company name imprinted on it in some way
You are distributing a large number of them
then it doesn’t count toward the $25 limit. Examples could include calendars, coffee mugs, pens, notebooks, tshirts, but they have to meet all 3 requirements above (1, 2 and under $4).
You would just create a category in your business bookkeeping - Business Gifts - that would store these gift purchases.
The account would just need to be adjusted when gifts are over $25.
This limit has been in place for decades
The IRS hasn’t raised this limit in decades, so no it hasn’t increased with inflation, but I don’t foresee this limit changing anytime soon though either.
If you buy gifts in your business, anything over the $25 limit, you’ll have to eat the cost as a loss.
Is giving gifts worth it?
I personally see gift giving as something that makes working with you as a benefit.
Gifts aren’t something you have to give. But you can surprise the people who refer someone to you with a gift for the referral and they would most likely keep referring people to you.
And you can give your clients gifts for working with you, and they may continue to work with you for years to come.
The same with giving employees and contractors more pay, they will continue to love working with you.
It’s your choice to give gifts, but you are limited to $25 expense deduction.