BUSINESS GIFTS
To Our Business Clients and Friends:
Most taxpayers are at least vaguely aware of the tax rule that limits the
deduction for business gifts to $25 per person per year-a limitation that
hasn't been raised in decades. What isn't as widely known is that there are
a few exceptions to this rather restrictive limit. When one of these
exceptions applies, you typically have no limit (or at least, a much
higher limit) on the deduction for business gifts.
Here's a quick rundown of the major exceptions to the $25 limit.
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Gifts to a Business Entity
versus an Individual. The $25 limit only applies to gifts directly or indirectly
given to an individual. Thus, gifts given to a company for use in the business
aren't subject to the limit. Even gifts such as tickets to a sporting event
or the theater can avoid the limit under this exception if given in a situation
where the taxpayer doesn't reasonably know who will use the gift. Thus, four
$30 tickets to a major league baseball game given to a large company's
accounting department for use by whoever wants them in the department would
generally be deductible for the full $120 cost.
-
Gifts to a Husband and Wife.
If you have a business connection with both spouses and the gift is for both of
them, the $25 limit doubles to $50.
-
Only Direct Costs are Limited.
The incidental costs of making a gift aren't subject to the limit. Thus, the
costs of custom engraving on jewelry, and the costs of packing, insuring,
and mailing a gift are deductible over and above the $25 limit for the gift
itself.
-
Gifts to Employees. Although they
have their own limitations and may be treated as compensation to the employees,
an employer is allowed to deduct the costs of gifts made to employees.
-
Gifts versus Entertainment
Expenses. Entertainment expenses are normally only 50% deductible and gifts,
of course, are typically 100% deductible, but only up the first $25 of cost
per donee per year. In some situations related to gifts of tickets to sporting
and other events, a taxpayer has a choice whether to claim the deduction as a
gift or as entertainment. The gift deduction is a better deal for lower priced
tickets, but once the combined price of the gifted tickets exceeds $50,
claiming them as entertainment expense is more beneficial.
As you can see, there are several exceptions to the $25 rule. Thus, many businesses
will be able to meet at least one of them. To the extent your business qualifies
for any of them, it's important that the qualifying expenses be tracked separately
(typically by charging them to a separate account in your accounting records) so
that a full deduction can be claimed.
If you have any questions regarding the types of gifts or gift-giving situations
that may qualify for a full deduction or how to properly isolate and account for
them in your records, please call us so we can help you get to the right answers.
Best regards,
Steve Barlotta, CPA
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