Most people are generous by nature. We love to see the look on someone’s face when he or she gets the perfect gift—especially when that someone is a business associate with whom we’re eager to keep a good relationship.
Unfortunately, the IRS tax laws limit tax deductions for business gifts to a total of $25 per person, per year. That means all gifts to your client through the whole year—including holidays, birthdays, and other occasions—cannot exceed $25 to any one person.
And remember that if you give your client’s son or daughter a gift, that is also considered a gift to your client. (Read chapter 3 of IRS Publication 463 for more details.)
The $25 limit can make it difficult to find gifts for your clients. The limit was probably reasonable when that amount could buy a set of fancy engraved pens or groceries for a family of five for a week.
But today you can barely buy a couple of movie tickets for $25.
What can you get for $25 these days? Well, you can get nice luggage tags, a pair of mugs, or a set of dessert dishes at Nordstrom. At Crate and Barrel, you can buy a set of holiday beer glasses, a picture frame, or vase.
But are these really the kinds of gifts you want to give a client or business associate? How can you get around this $25 limit?
1. Make sure you are meticulous about your accounting. Separate the cost of wrapping, engraving, shipping/delivery, and sales tax from the gift itself. That way, you can use the entire $25 gift allowance specifically for the gift.
Be very careful to properly record each component of the cost so it is accurately placed in its own separate account.
2. Give your clients something imprinted with your company’s name or logo. The cost limit for this is $4 per item, but your company may provide these items at little cost to you.
3. Take your clients to a show. If you accompany your clients to a show, you can treat the cost as an entertainment deduction. While entertainment is only 50 percent deductible, you can be much more generous to your client with show tickets than with gifts.
If you give your client the tickets and don’t attend the show with him or her, the deduction will be limited to $25—or $50 if the client’s spouse is specifically involved in the business.
What about deducting personal gifts?
There are no deductions for personal gifts. However, if the total amount of annual gifts to any one person is more than $14,000, you will have to file a gift tax return (Form 709) with the IRS.
Eva Rosenberg, EA is the publisher of TaxMama.com, where your tax questions are answered. She is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.