Sometimes doing business entails making gifts to customers, clients, employees, and other business entities and associates. For several reasons, such gifts often make perfect business sense. Tax rules limit the deduction for business gifts to a less-than-generous $25 per person per year — a limitation that hasn’t been raised in decades. When this limit was added into law back in 1962, the $25 business gift deduction limit only affected the most extravagant gift-giving taxpayers.
Fifty-two years later, the $25 business gift deduction limit is unrealistically small in many business gift-giving situations. Fortunately, there are a few exceptions to this rather restrictive limit. When one of the following exceptions applies, you typically have no limit (or at least, a much higher limit) on the deduction for business gifts.
Here’s a quick rundown of the major exceptions to the $25 business gift deduction limit:
• Gifts to a business entity vs. an individual. The $25 limit only applies to gifts directly or indirectly given to an individual. Therefore, gifts given to a company for use in the business aren’t subject to the limit. For example, a gift of a $200 reference manual to a company for its employees to use while doing their jobs would be fully deductible because it’s used in the company’s business.
• Gifts to a husband and wife. If you have a business connection with both spouses and the gift is for both of them, the $25 limit doubles to $50.
• Only direct costs are limited. The incidental costs of making a gift aren’t subject to the limit. For example, the costs of custom engraving on jewelry, packing, insuring, and mailing the gift are deductible over and above the $25 limit for the gift itself.
• Gifts to employees. Although employee gifts have their own limitations and may be treated as compensation, an employer is allowed to deduct the full cost of gifts made to employees.
• Gifts vs. entertainment expenses. Entertainment expenses are normally only 50% deductible and gifts are typically 100% deductible, but only up to the first $25 of cost per donee per year. In some situations related to gifts of tickets to sporting and other events, a taxpayer may choose whether to claim the deduction as a gift or as entertainment. The gift deduction is a better deal for lower-priced tickets, but once the combined price of the gifted tickets exceeds $50, claiming them as an entertainment expense is more beneficial.
As you can see, there are several exceptions to the $25 rule so many businesses will be able to meet at least one of them. To the extent your business qualifies for any of these exceptions, it’s important that the qualifying expenses be tracked separately (typically by charging them to a separate account in your accounting records) so that a full deduction can be claimed.
Also, remember that to obtain any deduction as a business gift, you must retain documentation supporting the following: (1) the gift’s cost and a description of it; (2) the date it was acquired; (3) the business purpose of the gift; and (4) the business relationship to the taxpayer of the person receiving the gift.
If you have any questions regarding the types of gifts or gift-giving situations that may qualify for a full $25 business gift deduction limit or how to properly isolate and account for them in your records, contact your Untracht Early advisor so we can help you get to the right answers.