Tax Deductions for Gifts

By Chris Peden

The holidays are a time of year for spending time with family and friends, and showing appreciation for the people in your lives. If you gave small gifts to your clients or employees, you may be able to deduct the cost of some of your gifts on your taxes.

The IRS outlines the rules in Publication 463 – Travel, Entertainment, Gift, and Car Expenese. Let’s take a look at some of the rules that you need to abide by in order to deduct the cost of gifts you give to your clients and employees.

The general rule is that you cannot deduct more than $25 for business gifts you give, either directly or indirectly, to each person you give a gift to during the tax year. Directly would mean you give the person the gift directly, say sending a case of candy to John Nguyen at his office. However, indirectly means that you sent the gift to the company, and intended for the gift to be for the eventual benefit or personal use of a particular person (John Nguyen) at the company, or a limited group of people (the Accounts Payable Team at Nguyen, Inc.).

So what happens if you give a gift to a member of your customer’s family? In this case, the gift is considered to be indirectly given to the customer. However, if you have a business connection with that family member, independent of the connection with the other customer, than the gift is not considered to have been given to the other customer indirectly.

If you are married, you have a rule to follow as well. If you both give gifts, you both are treated as if you were one taxpayer. Even if you have separate businesses, or employed at different companies, or even if you and your wife have an independent connection with the person to whom you give the gift.

When you give a gift, you may incur some costs to have engraving done, or to insure and mail the gift. These are considered incidental costs. The cost is considered incidental if, according to IRS Publication 463, “it does not add substantial value to the gift”. These types are costs are not included in the determining whether your gift is over the $25 limit. However if the cost of the “incidental” item is no longer considered incidental if the value of the item is substantial is comparison to the value of the main gift.

There are some exceptions to the rules. An item is not considered a gift for the $25 limit if it costs four dollars or less, has your name “clearly and permanently imprinted on the gift”, and is an item that you would widely distribute, such as pens and items you distribute at a trade show as giveaways. Additionally, according to Publication 463, “Signs, display racks, or other promotional material to be used on the business premises of the recipient” are not considered gifts.

If you have any questions, be sure to find a good accountant who can help you work through all the issues you need to deal with as you run your business.