We hope you had a great holiday season! Now that it’s 2014 to start off the year, we thought we’d post an article on gift giving and tax deductions.
During the course of running a business, it is a common practice for business owners to give out gifts to its clients and customers. These can be excellent marketing tools for new services; however many of these items do fall into the category of “Gift.”
Let’s explore some examples:
You have a customer who has demonstrated brand loyalty and you want to thank them with a gift of appreciation. It has been decided that a pair of Seattle Mariners tickets is a fitting way of saying thank you. Now you purchase these tickets at a value of $100 each for a total of $200. You decide to give the first ticket to the business owner and the second ticket to family member whom you have met as a gift.
Let’s now determine what category the first ticket is under. Since the ticket is intended for future use, and you are not in attendance, this is considered a gift for tax deduction purposes. However, if this ticket was to be used in connection with a meeting or if you are in attendance, then this would be considered an entertainment expense. In this case you should weigh the consequences of whether or not to call it a gift or entertainment expense beforehand. It is best to take advantage of the tax break that you would have if you prepared to treat this as an Entertainment expense which has a larger benefit than a gift expense. The key here is planning before purchasing and giving.
The second ticket in which you gave to the family member has some points to consider. If the family member is not an employee of the parent company or your company does not have a business agreement specifically between you and that family member this is called an “Indirect Gift.”
Gifts are also expenses in which they are considered joint expenses if you and your spouse give them together even if your spouse is not a part of your business. So as you can see, it is best to plan and forecast any gifts in which the amounts can add up to a sizable amount and use the deduction to the best of your advantage.
Limitations on Business Gifts:
In the normal course of business, gift deductions are limited to $25 per gift. So as you can see in the aforementioned example if you were to choose the gift deduction instead of the Entertainment deduction you are limited to the $25 rule.
If you are giving a gift in which there are certain costs associated with it such as engraving, personalized messages, etc. there are certain limitations for this category. The definition of incidental cost is a cost which is a part of the gift but does not add value to it. With that in mind, please note that these costs are not applicable to the $25 rule for gift deductions. An example would be a box of pens or calendars which you purchase for your customers at $25.00 and you have a cost of $5.00 to add an engraving a message to it. The $5.00 is exempt for the $25.00 rule and is deducted in full as an incidental cost to the gift. Other examples include gift wrapping and packaging the gift.
Please review IRS Publications 463 for more guidelines.
CPA in Shoreline+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.