Business gifts such as gift baskets and holiday presents can demonstrate appreciation for clients, employees, or partners. However, business owners may question if these are tax-deductible expenses. While the answer is yes, taxpayers should be aware of specific rules, limitations, and caveats.
The most important rule is that only physical gifts can be considered business gifts and qualify for tax deductions. While gift cards may be viewed as gifts for employees or clients (and can be considered taxable income), they do not meet the business gifttax deduction criteria.
This article delves into the tax implications of giving business gifts, including the deduction limit, considerations around the cost of the gift, and other crucial information businesses need to know to remain compliant with IRS regulations.
Disclaimer: While this article was written using the IRS’s most recent guidance, it does not constitute legal advice. Always consult a legal expert to determine your exact taxation and reporting requirements.
Are Business Gifts Tax Deductible?
Yes, business gifts are tax deductible. You can deduct $25 per recipient per year.
As with most tax deductions, certain limitations apply. Businesses can only deduct up to the $25 limit, regardless of the number of gifts given to the recipient.
It's worth noting that incidental costs aren’t included in this total. Incidental costs refer to expenses associated with a gift that does not increase its intrinsic value, such as shipping and handling, gift wrapping, or engraving. These costs can be excluded be factored in when calculating the deduction amount for the gift.
Business Gift Tax Rules To Know
Thanks to the Internal Revenue Service (IRS), gift-giving is not without its restrictions. Here are some important rules to remember:
1. Only Physical Business Gifts Are Deductible
The IRS does not have strict guidelines on what qualifies as a business gift, except for one somewhat ambiguous requirement: the gift must be a physical item. If you can find the item in a retail store, it is likely an acceptable gift.
Cash and gift cards are never tax-deductible (even if you buy a physical gift card). Although businesses can give them as gifts to clients and employees, they cannot be deducted.
It’s also important to note that if you’re giving gift cards to employees, they are always considered taxable income and must be reported to the IRS – no matter the amount. (That means employees may wind up facing a tax bill for your generosity.)
The cost of event tickets given as a gift cannot be deducted as a business expense either. Under the 2017 Tax Cuts and Jobs Act, entertainment expenses are no longer tax-deductible, even if they have a clear business purpose. This includes payments for events such as wine tastings, spa retreats, and boat rides, as well as the cost of event tickets.
Interestingly, there is a small loophole: Business meals are still 100% tax-deductible as long as they are consumed in a restaurant. Yet few clients will get the warm-and-fuzzy feeling of a gift from a business lunch; they probably expect you to pick up the tab.
Even with the physical gift rule, this still allows for plenty of phenomenal options. Classic gifts such as chocolate, flowers, and wine are always a good bet, and you can find these – along with more unique choices – on Goody. Our gifting flow allows recipients to swap their gift if they don't love it. You don't need their shipping address — just their phone number or email.
2. Keep Records of Your Business Gifts
This being the IRS, you must keep track of everything, including your business gifts. If you’re audited by the IRS, you’ll need to show what you bought and include some critical information and documentation.
When you give a client a gift, keep records of:
- The amount you spent on the gift
- Description of the gift
- The business purpose of the gift
- Whom you gave the gift to
- The relationship between you and the recipient
- When the gift was purchased
We recommend keeping an organized spreadsheet to keep track of all of this information throughout the year.
3. Indirect Gifts Are Factored Into the Client Gift Limit
Indirect gifts refer to gifts given to either the client's business or to a relative of the recipient. For example, sending a $250 appliance to a ten-person office is a deductible indirect gift. In this example, you’re spreading a $250 gift across 10 recipients.
However, you can't also write off a $25 bouquet of flowers you sent to the business owner because it would have already been counted in the $25 limit.
While less common, this same rule applies if you give a gift to the client's spouse, parents, or any other family member.
4. Married Couples Can’t Deduct Separate Gifts to a Single Client
If you and your spouse both have separate businesses and each gives a gift to the same client, only one of you can deduct the cost of the gift as a business expense.
Married individuals are viewed as a single entity for tax purposes, which means that only one of you can write off a gift if you and your spouse each do business with the same client.
Note that this doesn't apply if you're in a non-marital relationship with someone, even if you work for the same company.
5. Under $4, Some Gifts Are Exempt From the Client Gift Limit
While the limit for writing off most client gifts is $25, there is an exception to this rule. If you give someone a small present that costs less than $4, you can write it off even if you’ve already hit the $25 limit. Still, not everything falls under this exception.
The $4 gift, to qualify for the exception to the $25 limit, must be promotional and regularly distributed, such as pens, USB drives, notepads, and pins with your company name.
If you give a client a random gift, like a chocolate bar, and they have already received $25 worth of gifts from you, you cannot write off the cost of that gift.
6. Employee Gifts Can Be Deducted, But May Be Taxable Income
Yes, you can write off gifts given to your employees, though you still need to adhere to the $25 limit.
It’s important to note that unless the gift is small and part of your regular business practice, your employees may be responsible for paying taxes on it, and you’ll need to factor in the gift's value when doing payroll.
One way to thank employees without creating additional paperwork is by giving gifts known as “de minimis fringe benefits.” According to the IRS, these gifts have such a small value in relation to how often they are given that accounting for them would be impractical.
Consider low-value or infrequent gifts for employees that do not require writing off as "de minimis fringe benefits." Examples include a T-shirt for new hires, a birthday cupcake, or a bouquet for a new engagement. These gifts are so small in value or given so infrequently that accounting for them is impractical. If you’re looking to understand whether employee gifts are considered taxable income (and how to ensure you don’t cross the de minimis threshold), this guide has you covered.
How Goody Can Help
As you’ve read above, you probably want to avoid sending gift cards as business gifts – given they are taxable income for employees and virtually never deductible.
To send a tangible gift that your recipient will truly appreciate, try Goody. If the gift isn't quite right for them, don't worry! They can easily swap it out for something else in the Goody catalog of equal or lesser value.
You can even send a Gift of Choice – which only includes physical gifts. You simply set a price point and let recipients choose anything they fancy in that range, with no pricing shown.
With Goody, sending corporate gifts to clients and employees is easy. Simply provide an email or phone number, and you can send some of the most memorable gifts without needing a shipping address.
Get started today when you sign up for Goody Business and get $20 off your first gift.
Sources:
De Minimis Fringe Benefits | University of Louisville
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