Claiming Business Tax Deductions for Gifts - What You Need to Know

November 28, 2016

As we approach the holiday season, we wanted to make you aware of the IRS rules for gifts to employee, business associates, and referral sources.  A little known rule is that business gifts are limited to $25 per person, per year.  Yes, that’s a low amount!  This limit has not been updated by the IRS since 1954.  So what do you do when you wish to give gifts of more than $25?

BUSINESS GIFTS

A little unknown rule is that business gifts, to individuals, are limited to $25 per person, per year.  Yes, that’s a low amount, and it’s not adjusted for inflation. (This limit has not been updated since 1954.) Business gifts to individuals in excess of $25 are non-deductible. Here are a few things to consider: 

  • A gift to a member of a client's family is treated as a gift to the client, unless there is a legitimate business connection to the receiving family member.
  • If husband and wife both give gifts, they are treated as one taxpayer for purposes of the $25 limitation—it doesn’t matter if they work together or have separate businesses.  
  • The $25 limit applies only to gifts to individuals. That is, if you send a gift basket to Beaird Harris, there is no limit, unless the gift is intended for a particular person.  In that case, the gift would be limited to $25. 
  • There are special considerations when entertainment tickets are involved and the treatment depends on whether the giving party also attends the event.  In most instances, the cost of the tickets will be an entertainment expense (subject to the 50% limitation). 
  • Small promotional items (think pens, key chains, etc.) that have a cost of less than $4 AND have the company name imprinted, are not included in the $25 limitation. 

EMPLOYEE GIFTS

  • The IRS is a bit of a “Scrooge” when it comes to gifts and bonuses you give to your employees.  The IRS considers most gifts to employees a payment for services that has to be included as income to the employee.  That is, you include the gift amount in the employee W-2 and they pay taxes on it.  This rule applies to Christmas gifts, holiday bonuses, birthday gifts, and even wedding gifts.  The rules are the same if you give cash, gift cards or an actual present.  There are few narrow exceptions, including the gift of a small item like a holiday ham or a true employee award, such as a 10 year safety achievement award.  The value of employee gifts should be included in your payroll run before year end.  

The rules around this area are complex. If you need help with these rules, please let us know and we can walk you through it.  

Have a happy holiday season!