If you incur expenses related to your business, you may be able to deduct those expenses on your tax return. In previous articles, we touched on deductible business-related travel and entertainment expenses. This publication is focused on business-related gift expenses.
If you give gifts in the course of business, you may be able to deduct some or all of the cost of the gift.
$25 Deductibility Limit
For business gifts given to individuals, you are limited to deducting no more than $25 per person per tax year. The $25 limit applies whether the gift is given to the individual directly or indirectly. Indirect gifts include gifts given to a company for the use or benefit of specific individuals. Likewise, if you give a gift to a family member of a customer, the gift is generally considered an indirect gift to the customer and is subject to the $25 deductibility limit. The only exception is if you have a separate and legitimate business connection to the family member.
If you and your spouse both give gifts to an individual, you are limited to the $25 deductibility limit in total. This limitation applies even if you have separate businesses and separate relationships with the individual.
When determining the cost of a gift, incidental costs are typically not included. Incidental costs are those costs that do not add substantial value to the gift. Examples of incidental costs include but may not be limited to engraving on jewelry, insuring, mailing, and packaging.
Item Omitted from Calculating $25 Deductibility Limit
Certain items are not included in calculating the value of gifts given to individuals. Those items include the following:
- Items that cost $4 or less and have your name permanently imprinted on the item or is one of identical items you distribute on a wide basis. Examples of such items include pens, pencils, magnets, and plastic bags.
- Display signs, racks, and related materials, for purposes of creating a promotional display on the business premises of the recipient.
Classification of Items as Gifts or Entertainment
Some items may be classified as either gifts or entertainment. If an item can be classified as either a gift or entertainment, the item should generally be considered entertainment.
Here are the correct approaches for classifying certain items as gifts or entertainment:
- Items of packaged food or beverages given to an individual for use at a later time should be treated as gifts.
- Tickets to a sporting event, theater performance, or other show where you do not attend the event with the recipient can be treated as a gift or entertainment. You can choose to classify the tickets according to how they provide you the greatest tax benefit. If you elect to change the treatment of the tickets for tax purposes at a later date, you can do so by filing an amended return. An amended return must be filed within three years from the date of when you filed the original return or within two years of when you paid the tax, whichever occurred later.
- Tickets to a sporting event, theater performance, or other show where you attend the event with the recipient must be treated as an entertainment expense. When you attend the event, you do not have the option of classifying the expense as a gift.
Where can I get additional information about deduction of business-related gift expenses?
If you have business-related gift expenses or other business expenses you want to deduct for income tax purposes, you can speak with a tax attorney to get guidance on how to take full advantage of the tax laws. Tax attorneys have the experience and education to make sure you get the maximum legal benefit due to you.
Please complete the form below or call the telephone number at the top of this web site. Someone will contact you for an initial consultation on how a tax attorney can help you. The initial consultation is free of charge, and all conversations with a tax attorney are protected by attorney-client privilege.
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Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.