When Are Gifts Deductible Through Your Business?

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There are certain rules to follow when deciding if it is in fact deductible.

First off, there is a $25 limit for business gifts and this is only good once per client per tax year. For example, if a gift to one client costs $75, only $25
of the total cost is deductible. If the $75 was for 3 gifts (of equal value) to 3 clients, then it is deductible.

Now, you ask, can both my spouse and I give gifts to the same person for double the deductible? Unfortunately, the IRS says no. If you both give gifts to the same person, you are treated as one taxpayer. Hence limiting you to the $25 limit.

Another rule that can be tricky is giving gifts to the family members of clients. If you give a gift to a client’s family member and the gift is not intended for use by the actual client, the $25 rule may be used twice–once for the client and once again for the client’s family member. However, you must have a valid reason why you are gifting the family member. Let’s say you gift the wife of a client a gift card to a restaurant. While it is not intended for the clients use, it will most likely be shared between the couple and the $25 may only be used once.

Now there are certain exceptions when gifting clients. If an item such as a poster or a sign is given to a client and is used for advertising or promotional purposes then it does not follow the $25 deduction limit. Another exception to this is if the item given permanently has your business name, costs less than $4 AND is one of many you plan on distributing. This is intended to cover promotional items that are more related to marketing than gifts.

This $25 limit can be problematic for certain industries that traditionally give gifts to their clients. For example, realtors frequently give gifts after a client closes on a house. Sometimes these gifts are greater than $25 in value. Remember, you can gift more than $25 to that client, but the deduction will be limited to $25, so if you give a housewarming gift worth $100, then $75 of that gift will not be deductible.

If you have any questions about expensing gifts to clients or customers, sign up for a free tax consultation below.


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