With the holiday season in full swing, many of us are in a gift-giving mood. So this begs the question: Does the IRS allow business owners to write off gift expenses as a tax deduction when filing with Uncle Sam?
Basic IRS Rules on Gifts
Generally speaking, gifts are considered a tax write-off by the IRS when they are given to either a business owner’s colleagues or employees, or to clients. But keep in mind that the IRS has an amount limit to this deduction. A maximum of $25 can be claimed as a business expense for each gift given to each individual every year. This means that if a small business owner hands out a holiday present that is valued at or below the $25 threshold, the entire purchase for this gift can be deducted. However, any amount that exceeds this $25 limit cannot be claimed for the write-off. The $25 deductible amount refers to the recipient of a gift. So if you give an employee 3 gifts in a year worth a total of $200, only $25 of this amount can be written off on your return for that particular tax year.
Accounting for Incidental Costs
Incidental costs are often overlooked during the gift-giving process. These expenses are those that cannot increase the actual value of a particular gift. Examples of incidental costs include shipping fees and wrapping paper. Since these separate costs do not make any gift worth more than its actual value, the IRS does not allow them to be tacked on to the total cost of a gift for the deduction.
Indirect Gifts vs. Direct Gifts: What You Should Know
IRS guidelines state that there are 2 basic categories in which business gifts are classified – direct gifts and indirect gifts.
Direct gifts are given directly from a business owner to a recipient. There is no middleman or third-party recipient involved in the process. For instance, when a small business owner gives a box of cookies to an employee, this is a direct gift.
On the other hand, indirect gifts are given to a recipient by way of another individual, such as a middleman. Let’s say a manager gives a female client a bottle of cologne intended for her husband. This would fall under the indirect gift category because the gift is going to someone other than the individual who initially takes it.
It’s important to understand the direct vs. indirect gift distinction since the IRS limits the $25 deductible amount to each gift recipient per year.
Entertainment-related Business Gifts
While the $25 deductible limit on business gifts is set in stone, there is a legitimate workaround. This depends on the type of gift you give someone. Because business owners can deduct up to 50% of business-related entertainment expenses, gifts can be included in this category. So if you give an employee or client an entertainment-related gift, its cost may qualify for the 50% deduction, which could offer more tax savings than the traditional $25 gift deduction option. Gifts under the entertainment umbrella may include tickets to a Broadway show in New York or a vacation package to the Florida Keys.
To learn about additional business tax deductions and other ways to keep more of your hard-earned income as an individual or business owner, contact 1-800Accountant at 1-800-222-6868 or at www.1-800Accountant.