How do you strengthen relationships with customers and/or business partners? A tried and true way is using gifts. However, gifts cost money, so the next question is, are business gifts tax deductible?
The straight answer is yes, but it’s much more nuanced than that.
There are limitations
Business gifts are tax deductible, up to a certain dollar amount. You can deduct no more than $25 of the cost of the gift you give to each person through the course of the year.
Incidental costs such as engraving, packaging, and shipping are not included in the $25 limit as long as it doesn’t add substantial value to the gift.
Gifts that cost $4 or less are not included in the $25 limit IF the company name is permanently placed on the item and the gift is widely distributed.
Any item that can be considered a gift or entertainment is usually considered entertainment and is deducted at 50% of the value of the gift. For purchases that fall under both categories, use the “gift deduction” on lower-cost items and the “entertainment deduction” on items larger than $50.
Gifts to others
If you and your spouse give gifts to the same person, you’re treated as one taxpayer. The same rule applies to partnerships.
Gifting to a customer’s family counts as a gift to that customer, unless the customer’s family member(s) is a client as well.
The $25 limit only applies to gifts given to individuals. Gifts given to other companies, generally, don’t apply and are fully tax deductible.
Gifts to employees are taxable compensation.
Other relevant information
Keep adequate documentation that includes the purpose of the gift, what was spent, the date of purchase, and the business relationship.
Gifts given to a 501(c)3 non-profit are tax-deductible. Up to 25% of taxable income for a corporation.
A large majority of the information I have listed above came from the IRS publication about “Gift taxes”.
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