Let’s Make Gifting Less Taxing (Know What You Can and Can’t Deduct)
The Taxes of Business Gifts
Ah, tax season. It’s the time of year many companies are sending something the government’s way that they’d rather keep for themselves. (Total tax due, anyone?) So, as you’re gathering receipts and year-end reports, it’s worth remembering that the business gifting you did last year can have a positive effect on your tax returns.
Are business gifts tax deductible in 2020?
Corporate gifting is about creating strong customer and employee relationships. Stay true to that fundamental concept, and your gifts will be sincere and appreciated. But that’s not to say you can’t take advantage of potential tax deductions. The IRS places specific limitations on using gifts as a tax deduction. Here’s a quick summary to help you file yours correctly this year—and plan to make the most of your gifting strategy next year.
What is a business gift?
The IRS defines a business gift as something given “in the course of your trade or business.” Generally, it applies to gifts that are tangible. Gifts of cash don’t count. Gift cards can be iffy. And entertainment (such as tickets to a sporting event) is generally classified as “entertainment,” meaning it’s not tax-deductible.
Traditional gifts (think pen set or gourmet gift basket) fit into two categories. A direct gift is presented directly to a customer or employee. An indirect gift is intended for that person’s family (for example, sending a get well gift to an employee’s or client’s spouse). The recipient matters when the IRS calculates the amount you are allowed to deduct for taxes.
Can gifts be tax deductible? How much of a business gift’s value can you deduct?
The IRS has had a longstanding limit of allowing a deduction of $25 per person, per year. Most tax experts don’t expect that to change in the near future.
The “per person” rule might be better interpreted as “per customer” or “per corporate giver.” If one of your customers is a small business owned by a husband and wife, you may take only one $25 deduction for the company. (You can’t deduct a $25 gift for the husband and another $25 gift for the wife.) Similarly, your business can’t deduct a $25 gift from each of your employees to the same customer. Just one $25 deduction per sender and per customer counts.
What counts as a business gift expense?
While $25 is a nice deduction that can add up, it’s not overly generous. Fortunately, the IRS does not count “incidentals” toward your deduction. Costs such as engraving, wrapping, packing, shipping, and insuring a gift need not be applied to the $25 value. However, anything that is an essential part of the gift (like a tray that comes with a gift of cookies) is not considered incidental and should be part of the total valued amount.
Besides incidentals, another exception to the $25 limit is an inexpensive gift that primarily serves a marketing or awareness purpose. If an item has a value less than $4, has your company name on it, and is one of many identical items (think mugs, calendars, pens, t-shirts, etc.), it does not count towards your $25 per person limit.
Do customers and employees have to report gifts?
Any amount of cash or equivalent (e.g. gift cards) is subject to income taxes, to be paid by the recipient. However, gifts with a relatively low value known as “de minimis” gifts are treated more like a tax-free perk.
De minimus fringe gifts generally include holiday gifts, occasional gifts for appreciation or celebrations, or occasional snacks or drinks for employees. They must be of nominal value ($100 is considered the acceptable threshold), given infrequently, and have no cash or cash-equivalent value.
What information do you need for corporate gifts to be tax deductible?
If you plan to count your business gifts as tax deductible, it is important that you keep detailed records of specific information. It is easier to track your business gifts if you charge them to a designated separate account. This keeps everything in one place, so you are less likely to miss an item or mix up your gifts with other expenses.
You will also need to create a document that tracks the following details for each purchase:
- Cost of the gift
- Description of the gift
- Date gift was purchased
- Business relationship between giver and recipient
- Business purpose of the gift
Who can accept a gift?
Some organizations, especially those in government and non-profit sectors, have policies that place a strict cap on gift values or prohibit any gifting whatsoever.
If you’re not sure, or if it’s the first time you want to send something to a customer, check with their Corporate Relations or HR department. Many large organizations have a well-defined “gift acceptance policy” that spells out which employees can or cannot receive gifts and what the maximum value of a gift can be. Be careful, some limits are as low as $15.
Investigating a group’s gift acceptance policy will prevent you from spending unnecessary dollars, and more importantly, will avoid awkward situations when a customer has to reject a gift or feels put on the spot when receiving it. And don’t feel bad if you can’t give every customer a gift. A sincere thank you note or other greeting goes a long way to building relationships.
It is not uncommon to celebrate employee birthdays, years spent with the company, or retirement. Employee gifts in your company culture may also be part of holiday celebrations and general appreciation when people have gone above and beyond in their performance.
Employees can accept gifts for these occasions, but they may be subject to taxation as outlined in previous sections of this article. However, there are exceptions. For example, gifts given to an entire department or the whole company can be acceptable if done appropriately. A gourmet gift basket for several people is acceptable as long as your company or the recipient does not have a set limit on the cost.
Additionally, holiday parties are a great way to thank your employees while taking advantage of a tax break. As long as you only invite employees that are not highly compensated already, and their families, the entire event may be tax deductible. If it is an open event for customers and employees, you may be able to get a partial deduction.
As previously mentioned, client gifts are tax deductible within limits, such as the $25 cap. It is appropriate to give clients gifts for a number of reasons. Birthday wishes are always appreciated, thank you notes and gifts are wonderful, and a welcome gift for new clients gets your working relationship off to a great start.
You can also keep client gifts simple and inexpensive by giving them pens, notebooks, or water bottles. Or get a little more personal with coffee table books, succulents, or swag (think tee shirts or golf gear). Some of the most popular gifts involve dessert, dinner, or technology.
You can also send gifts to clients around the holidays when we tend to express gratitude for our friends and family. Include your important business relationships when you make your list and check it twice. Let them know they matter by sending them a holiday gift basket with gourmet soup, rolls, cookies, and special holiday items like a super soft blanket or scented candle.
A group gift for your boss would most likely involve paying from your own pocket and pooling your money with your team. In this instance, the gift is obviously not tax deductible.
If you are reaching out to an executive from a partner company, make sure you know the rules for both companies and don’t cross any lines. You may need to stay within a set budget or send the gift to the entire team, rather than just the leader.
Great executive gifts include coffee, tea, insulated mugs, coasters, travel organizers, desktop zen gardens or other stress-relieving knick-knacks, fancy day planners, calendars with daily quotes, custom paperweights, or a corporate gourmet gift basket from Spoonful of Comfort.
Plan ahead for next year
While a $25 tax deduction may feel relatively low, successful corporate gifting efforts aren’t about getting the write-off. Research shows that most companies spend $75-100 for mid-level customer associates, and upwards of $150 for executive contacts and most-valued clients.
Clearly, the tax deduction is just a fraction of the gift’s value—and doesn’t come close to representing the relationship built. However, when you consider the goodwill created by sending a thoughtful gift to a junior customer to welcome them on board, or a thank you gesture to a vendor who pulled off a last-minute miracle, your total tax deduction for gifts sent throughout the year can be significant.
As you finish off your tax preparations this year, keep in mind opportunities you can take in the months ahead. Calendar in possible gifts for holidays and business anniversaries, and keep an eye out for times to express congratulations, thanks, and sympathy. Your thoughtful generosity will be a small win at tax time—and more importantly, it goes a long way towards invaluable client, customer, and employee loyalty.
Schedule Gifts with a Corporate Account from Spoonful of Comfort
Make your corporate gift giving even easier this year with help from Spoonful of Comfort and our tools for business gifts. When you sign up for a free corporate account, you get a personal account specialist who will help you schedule your gift deliveries in advance. You can even make a bulk order that includes an entire year of client gifts or employee birthdays.
Plus, when you order corporate gifts in bulk, you’ll earn rewards for yourself and a 15% discount for the order. Choose from a carefully selected menu of gourmet items and thoughtful gift baskets for your VIP list and show them how much they mean to you. Don’t forget to keep a careful record of your generosity and make sure your corporate gifts are tax deductible.
Support for this article may be found on the IRS website. Be sure to consult with your tax professional about the most recent tax laws and how they apply to you.