Are holiday gifts for your employees and clients deductible? Before you start spending this holiday season, read up on these IRS rules.
As we enter the Christmas season, many business owners want to display their gratitude to customers and employees by showering them with generous gifts. During this tough economic environment, making the extra effort to display appreciation will be duly noted. Yet many business owners fail to realize that the IRS takes a different view of gift giving. They tend not to be as generous, which means that spending your business’ money on gifts doesn’t guarantee that they are deductible business expenses.
IRS Publication 463 “Travel, Entertainment, Gift and Car Expenses” outlines very clearly which gift expenditures can be deducted on your company’s income tax return.
According to Publication 463, you can only deduct up to $25 in gifts per year per person. If your company gives a $100 fruit basket to the owner of a client company, only the first $25 can be deducted as a legitimate business expense on your tax return. The IRS has seen everything when it comes to people finding a way around this regulation and they specifically address these strategies.
For example, the $25 limitation covers both direct and indirect gifts. Let’s say you want to give your client a gift of two silver-plated pens, with each pen valued at $25. You give one pen to your client and one pen to her assistant, knowing full well that she will turn it over to her boss who will then give it to her husband. This is considered an “indirect gift” to the client and therefore the second pen is not deductible.
The same is true if you try to use your spouse as a conduit for gift giving. If you were to give one pen to your client and then your spouse gives the other pen as a gift to the client, the second pen still isn’t deductible. The IRS considers gifts from a spouse to be tantamount to a gift from you. It doesn’t matter if your spouse has their company or genuinely wants to give a gift separately from you.
Some people try to break up gifts and give them to family members of the recipient. Sending an employee and their family tickets to Disneyworld could easily turn into a $500 gift. Giving one ticket to each member of the family won’t increase your $25 deductibility limit because gifts to family members are considered separate and distinct from the original gift only if you have a bonafide, independent business relationship with the receiving family member. So unless your employees’ 6th grade son is also a client, you are out of luck.
One area where the IRS does offer some leeway is with gifts that could also be considered entertainment, like the Disneyworld tickets above. In this case, if you do not go with the client, you can treat the expense as either a gift or entertainment expense, whichever is more favorable from a tax perspective to you. If you do go along, then you must treat it as an entertainment expense and you must explain to your employee why in the world you want to go on Space Mountain with him. This won’t come up too often with Disneyworld, but for a baseball or basketball game it could happen all the time. Generally, classifying these types of expenses as “entertainment” will provide a bigger deduction.
