Many business owners like to express their appreciation to clients and referral sources with gifts, especially around the holidays. Understanding IRS rules around gifts can help you show your generosity without creating any surprises at tax time.
$25 Limit
Businesses may not deduct more than $25 for business gifts made to the same person. For example, if you purchased a $75 gift basket for a major referral source, only $25 would be deductible on the tax return. The $25 limit does not include shipping costs, sales tax, gift wrapping, or engravings that do not add substantial value.
Of course, this dollar limit is to prevent unreasonable business expenses, but it is interesting to note that the amount has not been updated since 1962.
Bright Idea
Since the $25 limit is per person, you may deduct a larger gift if the recipient is a business with multiple employees. For example, if one of your clients has five employees, you could give a fruit and cheese basket costing up to $125 and deduct the full expense. Similarly, you could give individual gifts to key contacts within one company.
Be Wary of Entertainment
When selecting gift, be careful of gifts that could be considered entertainment. The Tax Cuts and Jobs Act eliminated the deduction for entertainment expenses as of January 1, 2018. Examples of entertainment include tickets to a sporting events and concerts.
Bright Idea
Instead of providing gifts that could be considered entertainment, consider taking the client to a meal. Business meals at restaurants remain 100% deductible in 2022 (rather than the normal rate of 50%). A meal can provide the same opportunity to connect with a contact as entertainment without the sticky tax rules. Furthermore, meals are not subject to the same low dollar limitation as gifts.
Small, Branded Gifts
Branded items that cost less than $4—think pens, chap sticks, or calendars—are considered advertising rather than gifts. Generally, you don’t need to record who you gave them to because they will not count against the $25 per person annual limit.
The holidays provide a great opportunity to tangibly express your appreciation for clients and contacts. Who doesn’t love to receive a thoughtful box of chocolates or bottle of wine? If you have any questions about the IRS rules surrounding client gifts or any other deductions, reach out to our office at 480-392-6801.
