Let’s Make Gifting Less Taxing (Know What You Can and Can’t Deduct)

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.

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 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.

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) are 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.

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 badly if you can’t give every customer a gift. A sincere thank you note or other greeting goes a long way to building relationships.

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 don’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.

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.