During the holiday season, most of us small business owners like to give gifts to our customers and clients to thank them for their business. Unfortunately, the IRS doesn't offer much of a deduction for business gifts to clients - only $25 per person, per year. Why the low limit? The original 1962 enacted limit has never been adjusted for inflation - if adjusted the deduction amount would be about $190!
Gifts to Individual Clients
The IRS $25 limitation for business gifts applies to each person you give a gift to that year. There is no limit on how many business-related people you can give gifts to or how much you spend for the gifts - but you can only deduct $25 per person. So, if you send a gift to a client that costs $50 - don't expect to deduct more than $25!
Some Basic Rules:
- If you and your spouse both give gifts to the same person, you are treated as one taxpayer and limited to $25 for that recipient. It doesn't matter if you and your spouse have separate business connections with the recipient.
- You can not include incidental costs in the $25 limitation; such as packaging, gift wrapping, engraving or shipping costs. Costs are incidental if they do not add value to the gift.
Maximize Your Deduction by Giving to the Company
As mentioned above, the $25 limit applies to each individual you give a gift to. You can maximize the deduction on a large gift by giving the gift to the entire company as long as the gift is not intended to be used by a particular person or limited class of people. For example, if you send a $400 gift basket to ABC Company with 15 employees and you can safely assume the company will share the basket of items with all of their employees, you can then deduct $375 of the gift basket cost ($25 limitation x 15 employees = $375).
Gifts of Entertainment
A gift of entertainment is not subject to the $25 limit. If you gift your client tickets to a sporting event, concert, etc - you may choose to deduct the tickets as a gift or an entertainment expense. If you choose entertainment expense, you may deduct 50 percent of the cost. In most cases, this strategy could give you a larger deduction than the $25 gift limitation.
If you go with your client to the event, you must treat the cost of the tickets as an entertainment expense. You cannot choose, in this case, to treat the cost of the tickets as a gift expense.
As always, it is important to keep records of all business gift expenses, as the IRS closely monitors this area. Be sure to record the date, name of the business and number of employees or business associate, the cost of the gift, and hold onto receipts to substantiate your deduction. For more in depth information see IRS Publication 463 or give us a call!