Deducting Business Gifts and the IRS Regulations
Giving gifts to clients and customers is often an effective and rewarding activity for marketing your business and for establishing long-lasting and very strong client relations. However, it seems that our friends at the IRS may not support this view. Maybe it is because nobody every gives the IRS gifts!!
All business owners need to be sure that your CPA is maintaining clear and accurate financial and operational information to avoid having your gift become non-deductible on your tax return, or worse yet, having you penalized and face tax penalties and owing interest for improperly deducting gift expenses on your tax return incorrectly.
We have scoured the IRS regulations and developed these Balog + Tamburri ProfitPlus Tax Tips for you. They include the following:
- KNOW WHO QUALIFIES AS A “BUSINESS ASSOCIATE:” In order to deduct the expense as a Business Gift, the recipient of the gift must be a bona fide “Business Associate,” which means there must be a demonstrable business relationship. Allowable recipients can include the following:
- Clients and/or customers – However gifts given to a customer’s child can be deducted, but it is still considered a gift to the business associate. So your CPA should be careful not to count the same person twice in calculating deductions
- suppliers and sub-contractors
- Service providers (delivery folks, janitorial staff, shared receptionists, etc.}
- KEEP PROPER RECORDS: You will need to record the date, name of the recipient and their business relationship, the cost of the gift, and any incidental expenses. NOTE: it is always a good practice to record the business purpose (maintain a customer; maintain relationship with a key supplier, etc.)
- KEEP RECEIPTS: When the IRS comes knocking, you must show a receipt to receive a deduction. The IRS does now accept electronic copies, so invest in a scanner. The NEAT scanners work very well.
- DEDUCTION LIMITATIONS: Be aware that there are limits to how much you can deduct. Regardless of the actual cost of the business gift, the deduction is limited to only $25 per business gift recipient per year. NOTE: Business Gift Recipient per year. This means that you can give each person in the client’s company a gift and deduct $25 of the cost – so you will need a listing of their names and exactly what you gave each person.
- REMEMBER THE INCIDENTAL COSTS: While only $25 is deductible for business gifts, remember that any incidental expense related to the gift also may be deductible. This could include anything that does not add significantly to the value of the item, such as shipping or engraving costs.
- ENTERTAINMENT TICKETS: There is a special twist if you gift a client with entertainment tickets, such as tickets to a football game. If you don’t attend the event with the client, you have the option of treating the tickets as a gift or as an entertainment expense. Gifts of up to $25 are 100 percent deductible, while entertainment expenses are only 50 percent deductible. So, with tickets that cost less than $50, you get a bigger deduction if you treat them as a gift. If they cost more, treat them as an entertainment expense.
- NOT BUSINESS GIFTS: There are exceptions:
- Promotional Items: Any items given as part of a general distribution, having a cost of not more than $4 and on which the giver’s name is clearly and permanently imprinted, and signs, display racks, or other promotional items given to a customer for use on his business premises, are not gifts. Since no amount transferred by or for an employer to or for the benefit of an employee is excludable as a gift no such amount is deductible as a gift for an employee, though it may be deductible under other rules—i.e. as compensation.
- Anonymous Gifts: Businesses can only deduct the cost of advertising and promotions when these expenses are ordinary and necessary. This means that advertising and promotional expenses are only deductible when they have a clear relationship to the business and its ability to reach customers, manage its brand image or provide information about its products. Efforts such as anonymous sponsorships or donations are not promotional because they fail to represent the business to the consumer, making them ineligible for deductions.
- Employee Holiday Gifts: If, as a means of promoting goodwill, an employer makes a general distribution to employees of food or other merchandise of nominal value at Christmas or a comparable holiday, the value of the gift isn’t included in the employees’ income.
- Employee “Cash” Gifts: If you give cash, gift certificates or similar items of readily convertible cash value, the value of the gift is additional wages or salary, regardless of the value. These MUST be included in the employee’s W-2.
If you have any tax questions, you can email me at Rick@flgacpa.com
Richard T. Balog, CPA is the Managing Partner of Balog + Tamburri, CPA’s with offices in Atlanta, GA, Jacksonville, FL and St. Augustine, FL. His contact information is lited below.