One of the many areas that makes owning and running a business exciting is the opportunities it gives you to interact with other individuals, contacts, or clients. Whether this be for staff you hire, vendors you order from, or service companies that help you run your business, the relationships and interactions are what make owning and running a business such a fulfilling experience.
Part of having and maintaining good relationships within your business involves recognizing the value that relationship brings. A quality way to recognize a business associate, partner, or client, is to give them a gift of gratitude.
Many business owners wonder if it is allowed to give gifts to your clients. The answer is yes, of course! However, what you gift and what you can use as a deduction for said gifts is more questionable.
Deduction Eligibility of Gifts for Clients
The IRS is aware that gift giving is something a business could do and therefore supports it as a deductible expense for a business. However, they are mindful of the opportunity this could bring to a business in terms of reducing their overall taxable income, so they have placed limits on said gift deductions.
The IRS guidelines include:
- You can deduct $25 per person each tax year. So for each client/vendor/employee/etc that you buy a gift for, $25 is deductible. You can spend more than $25, but anything above that threshold is not deductible.
- If you and your spouse both give gifts to the same person, both of you are treated as one taxpayer.
- Costs such as engraving, wrapping, packing, or shipping are not included in the $25 limit if they don’t add substantial value to the gift.
- Any item that could be classified as a gift for entertainment is typically considered ‘entertainment’ and cannot be used as a deduction. Examples include tickets to a concert, game, or show.
How to Use Gifts as a Deduction
The number one rule for managing gifts as a deduction is to keep your receipts for all gift purchases! This is crucial for demonstrating the amount, location the gift was purchased, and general reason for the gift. Without the ability to verify the gift details specifically, you could be subject to not being able to use any of the expense towards your total deductions.
Secondly, gifts to clients are welcomed if you choose, however it should be noted that this is not a business practice you should employ if your business cannot afford it. While giving gifts can help keep client relationships strong, gift giving is not the only way to do this. Delivering on said promises, keeping positive communication, and supporting one another is the best way to maintain a good relationship with your clients.
Gift Deduction Hack
Without question, $25 is a low limit when it comes to a client gift. Depending on the industry you are in, this might be laughably low in terms of demonstrating appreciation to a client.
Surprisingly, it has been YEARS since the IRS has increased the threshold for gift deductions. While there is nothing we can do about this limit and the associated requirements, there is a way to make your deductions for gifts stretch a little further.
If you purchase and include promotional items that have your logo on them (think engraved mugs, T shirts, pens, notebooks, the sky is the limit!) in your gift, these are considered marketing materials and are 100% deductible. By simply making your gift more branded to your business, you are able to deduct potentially way more in gift expenses.
Gift Giving & Giving Back
We are always supportive of our clients utilizing gift giving as a way to increase their deductions. However, we also love to support any opportunity to give back to charitable organizations or opportunities that can impact or improve the lives of others.
When looking for a way to increase your deductions for your business, consider a donation or sponsorship. While this comes as an expense to you, when for the right cause, it can bless a lot of other people.
Need help understanding your gift deduction specifics? Book a call with us!
And explore these other helpful blog posts that come with tips and tricks for navigating your business taxes:
- Common Bookkeeping Mistakes and How to Avoid Them!
- How to Know What Qualifies as a Business Meal Deduction
- Finance Basics Every Business Owner Should Know
The content in this blog post is provided for general informational purposes only and should not be considered professional tax or legal advice. The author is not a Certified Public Accountant, and no assurances can be made regarding the outcomes or consequences of tax returns, IRS actions, or any financial decisions based on this information. Readers are strongly advised to consult with a qualified tax professional or legal advisor for personalized guidance specific to their individual circumstances. The author expressly disclaims any liability for decisions made based on the information presented in this blog post.
