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.
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. Its 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. Obviously these costs must be paid for by someone, but 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 Dunkin Donuts 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.
Its 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.
Entertainment and Gift Giving
Although it’s not really a loophole, there is a subtle gift-giving circumstance that can help you deduct even more than the $25 limitation. According to the IRS, if a gift is a gift of entertainment, you can deduct up to 50% of the cost.
Business entertainment gifts are things such as concert tickets, sports tickets, movie passes, or even vacations and hotel stays. If you give multiple gifts to the same people throughout the year, chances are good that you’ll quickly exceed the $25 recipient limitation. For your next business gift, you might think about something a little entertaining. The recipient will surely love it and you may be able to increase your deductions.