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There are many wonderful reasons for buying gifts for your customers and business associates: maintaining good work relations, opening doors for opportunities, professional networking, and a thank-you for a job well done.
There’s also one more incentive to make those gift purchases. All or part of the cost of your business gifts can actually become tax deductions. Here are the rules.
Cost of the Gift
Like some tax deductions, there is a limit on exactly how much you can deduct when spending money on business gifts. Currently, that limitation is $25 per recipient per year.
Of course, you are free to spend as much as you want on gifts for your clients and business associates, but the IRS only allows you to deduct up to $25 of the cost of the gift. It’s important to note that the $25 deduction refers to the recipient of the gift, not the actual gift itself. For instance, if you purchase a gift for the same customer three times during the year totaling $45, you may only deduct $25 since each gift went to the same person.
However, if you bought those same three gifts and gave them to three different customers, you could end up deducting $25 for each gift, thus deducting your total purchase.
Understanding Incidental Costs
When purchasing gifts, it’s necessary to know what adds to the value of the gift and what does not. Let’s face it, when we’re filling out the deduction paperwork, it’s important to be accurate.
This is where incidental costs come into play.
The $25 limitation on tax-deductible gifts does not include incidental costs: these are costs that cannot truly increase the intrinsic value of the gift. Things such as gift-wrapping, shipping and handling, or engraving don’t really add anything to the value of the gift and therefore cannot be included in the value of the gift. While these costs must be paid for, they cannot be added to the total value when deducting the gift from your income.
Indirect vs. Direct
Once again, the IRS has a subcategory – the government subdivides business gifts into two categories: direct gifts and indirect gifts.
Direct gifts are given directly from the giver to the recipient with no middleman or third party recipient. A direct gift isn’t a box of donuts given to the office staff at Christmas. A direct gift is a pound of coffee given to a single individual for a job well done.
Indirect gifts are gifts given to an individual by way of another person. As an example, an indirect gift could be a set of kitchen knives given to a customer, but actually intended to be given to the spouse, knowing full well that the customer would never use them.
It’s important to understand this distinction because the IRS will count the gift towards the recipient’s $25 yearly allowed deduction. Remember, the deduction limitation is $25 per recipient per year.
Make Tax Season A Breeze
As a small business owner, knowing all the deductions and rules can feel overwhelming – but you don’t have to do it alone. TurboTax Live Full Service Business matches you with a specialized business tax expert to help uncover ways to save on your taxes, maximize deductions, and find all the industry-specific tax credits you deserve. Get taxes done and off your plate with the help of a TurboTax Business Expert.
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