Gifting is a big strategy in winning customer relationships, employee motivation, and business partners’ appreciation. However, upon introducing tax deductibility, there are some policies that the Internal Revenue Service (IRS) instills that should be adhered to by business entities.
The $25 deduction limit
The IRS permits businesses to take a deduction of up to $25 per recipient annually for business gifts. This is both a direct and indirect gift, meaning even where a gift whose value is more than $25 is given, only $25 may be deducted. What is worth mentioning here is that this amount has not risen since it was fixed in 1962, with inflation rising and other market fluctuations when conducting business.
Definition of business gift
A business gift, according to the IRS, is whatever is given in the conduct of your trade or business. The gift has to be usual and necessary and must have a definite business purpose, to be considered a deductible expense. Gifts that are utilized for earning income or for developing and maintaining business relationships will generally qualify.
Exceptions to the $25 limit
Certain items are not subject to the $25 limit for deductibility:
- Incidental expenses: Fees such as engraving, packaging, or mailing are not applied against the $25 limit if they add little significance to the gift.
- Promotional items: Promotional items costing $4 or less with your company name permanently marked thereon and distributed regularly are exempted from the $25 limit.
Gifts vs. entertainment
Any gift that can either be a gift or entertainment tends to be taken as entertainment and cannot be claimed. For example, if you provide tickets for a sporting game and do not accompany the client, it could be considered a gift. When you accompany the client, it is considered entertainment, which has other deduction rules.
Record keeping requirement
Accurate documentation has to be done for substantiating business gift deductions. Businesses are required to maintain records that substantiate the business purpose of the gift, cost incurred, date of present, and information about the recipient. This entails retaining receipts and documenting the business relationship with the recipient.
Gifts to employees
Employee presents are normally subject to the same $25 per person per year rule. Exceptions do apply, however, to certain groups of employee gifts:
- De Minimis Fringe Benefits: These are items so small it is unreasonable or administratively cumbersome to track them, such as holiday turkeys or occasional snacks. These are not usually treated as taxable compensation and are fully deductible.
- Award of achievement: Physical personal property awarded to employees during significant presentation for long service or excellence in safety may be claimed as deductible within the limits prescribed, but subject to fulfillment of stated conditions.
Gifts to corporations and partnerships
The $25 ceiling only applies in the case where gifts given directly or indirectly to an individual are involved. So, when giving a gift to a partnership or a company, the ceiling is not applicable, save where the gift is for the use or benefit of a person.
Tax consequences of exceeding the limit
If the business gift is over $25 per person per year, it’s only the excess over that amount that isn’t deductible. If, for example, you give a gift of $100 to a customer, you can only deduct $25, and $75 isn’t deductible. Gift-giving strategies must be thought through with great care to reap maximum tax advantages.
