Everyone knows it’s better to give than it is to receive, right? Well, when it comes to your business, it turns out that you can do both at the same time. Just as you can expense business meals and entertainment, you may also deduct a portion of the amount you spend on gifts for colleagues, clients, and employees. There are, however, some limitations as to who you can give to, what you can give them, and how much of a deduction you can receive in return. So whether it’s a basket of holiday cookies or tickets to a Beyoncé concert, here are four things you need to know about successfully deducting business gift expenses.
1. You can only deduct up to $25 per business gift.
We know you love your client almost as much as your client loves that gold-plated basket of pears. But as far as the IRS is concerned, you can deduct no more than $25 for each business gift per recipient for each tax year. It doesn’t matter whether you send that gift directly to your client, to their department, or to a member of their family. That $25 limit applies to everyone that may have benefited from your gift, even indirectly. However, if you send a set of gold watches to Mr. and Mrs. Smith, you will still be allowed to deduct $25 from each, provided that you have a separate (work-related) connection to each spouse.
2. You can’t deduct incidental costs.
Let’s say you’ve found that perfect gift for your IT department. While you always have the option of plopping it down in the middle of their desks unadorned, you’re probably going to want to wrap it first. Not to mention, giving gifts to partners at other companies means paying for shipping and handling. Know that in most cases, packing and mailing costs are considered “incidental,” and cannot be deducted. But if the packaging is considered to be part of the gift, like a hand-woven tote, its cost can be included in your deduction. Think the difference between wrapping paper and a decorative basket. Incidental costs may also refer to additional features that enhance the gift without substantially increasing its value–such as engraving.
3. Pens for everyone!
Certain kinds of items are considered to be exceptions to the $25 rule, and will not be counted towards your business gift expense limit. For example, you don’t need to include any widely distributed items that bear your name so long as they cost $4 or less. These small gifts most often manifest as pens, frisbees, and stickers with your company’s logo on them. Other strictly promotional items, such as signs or giant cardboard cutouts for display in your recipient’s storefront, are also not considered “gifts” for the purposes of the $25 deductible.
4. Are you not entertained?
According to the IRS, “any item that might be considered either a gift or entertainment generally will be considered entertainment.” (IRS Document 463 Ch. 3) So when in doubt, err on the side of an entertainment expense. But let’s say you give a client some tickets to an upcoming concert. If you attend the concert together, the cost of admission is automatically considered an entertainment expense. But if your client goes without you, you get to choose whether those tickets will be filed as entertainment or as a business gift expense. You are also free to change your mind about how to classify the expense, even after its been submitted to the IRS. If, after deducting the tickets as a gift, you determine that it would be more accurate (or more beneficial) to expense them as entertainment, you have three years to file an amended return.
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