If you’ve ever sent corporate gifts for the holidays or any other occasion, you’ve likely had a lot of questions about the tax implications of corporate gifting. If so, you are not alone; many others have wondered the exact same thing. The rules are confusing, having not been updated since 1962. Despite this, once you understand these rules, they can be rather straightforward. In order to make sure all relevant guidelines are clear, we will address them in this blog. We will cover what qualifies as a gift, the $25 rule, various exceptions, and how to ensure that everything is organized properly. Contact a tax professional with any questions.
How the IRS treats business gifts
The IRS considers a gift to be a business gift if it is given in the course of business. They also define a gift as anything knowingly given to someone without getting equal return, measured in money. Even though corporate gifts often lead to a higher ROI in the form of employee and client loyalty, this is not considered equal return because, in a strict view, the recipient is not paying for the gift. Any items that can be considered both a gift and entertainment usually fall under entertainment, such as a gift of concert tickets, and are non-deductible. However, gift cards and physical property like food baskets and curated business gifts are typically treated as gifts. A gift must be given to a client, employee, partner, or anyone else with a direct business relationship for the gift to be considered a business gift. However, it must be related to the business, so, for example, giving a personal gift to a friend who also happens to be a client does not count as a corporate gift.
One of the most important rules of business gift tax deduction is the $25 gift deduction limit. You can deduct up to $25 per recipient per year. This rule hasn’t changed since 1962, despite money being worth around 10x less than it was when the rule was created. This matters if you are planning on giving gifts of higher value, as you will need to take this into account when creating your corporate gifting budget. Even across several business gifts, the amount of money will remain $25. This means that if you send a gift worth $10 and another worth $15 to the same individual, you will have reached the deduction limit. An important thing to note is that $25 is not the limit of gift items you can send, but only a limit on what can be deducted. Most companies choose to send gifts that are more expensive than the $25 deduction limit.
Documentation of gifts is very important, especially with large amounts of gifts. Consider writing the following down as documentation.
- Names. You should write down both the names of the sender and receiver of the gifts.
- Business relationships. Are they a client, employee, or something else?
- Cost. How much did you spend on the gift?
- Contents. What was in the gift?
Proper documentation will make sure your tax filing experience is as simple as possible. Note that gifts under $75 sometimes require less documentation, but it is still recommended to write down what you can. It is always better to have more documentation than you need than not to have enough and have to chase down the details later. Using a corporate gifting partner can help ensure the experience is as simple as possible, as they provide you with things such as order confirmations, recipient lists, and payment invoices.
What Cannot Be Deducted? (Or Can Only Be Partially Deducted)
- Anything over $25 per recipient, per year. Only the first $25 per recipient can be deducted; after this, the excess cannot be deducted.
- Entertainment. Items such as sports tickets or concert tickets typically fall under entertainment rules, not gift rules. However, they may be considered gifts if you are not attending with the recipients.
3. Meals. Meals also fall under entertainment rules in most scenarios.
4. Cash. Cash is typically deductible, but almost always treated as compensation rather than a gift.
The Employee Gifting Exception
While employee gifting is often similar to client gifting, tax codes typically treat them as separate. In employee gifting lies an exception to the $25 corporate gift deduction limit. De minimis fringe benefits are things that may seem like gifts, but are treated differently by the IRS. De minimis fringe benefits are typically items that are low-value and infrequent. An example would be cheap food given out to employees during the holiday season, or a cheap promotional gift. The IRS does not set a limit on De minimis fringe benefits, but a common threshold is $75-$100. We recommend contacting your tax advisor for verification.
In terms of cash, on the other hand, it is almost always treated as taxable wages. Gift cards to employees are typically treated as compensation as well, no matter how low the value the card is, meaning it does not qualify as a de minimis fringe benefit. No matter if you try to frame the cash as a gift to employees, it is almost always treated as compensation. Thus, we recommend sending a tangible gift, such as a corporate food gift box instead of cash.
Incidental Costs and Promotional Items
There are other things that do not fall under the $25 gifting deduction limit. One is incidental costs. Incidental costs are not a cost associated with the items in the gift itself. Only items in the gift are subject to the limit. This means that things such as engraving, personalization, gift packaging, and shipping do not count towards the limit. So, if you buy a gift with a $25 tech accessory, spend $3 on packaging, $5 on branding the accessory, and $10 on shipping, the $25 tech accessory is the only thing counting towards the limit.
Another thing that doesn’t count towards the limit is promotional items. For an item to count as a promotional item, it must have your company’s name or logo on it and be distributed broadly rather than to a small group of specific individuals. Examples include things you might give away for free at a trade show, like branded pens, tote bags, or clips. These items are typically treated as a marketing expense rather than a gifting one. A branded item given to a client for a one-year anniversary counts as a gift and is subject to the $25 deduction limit; a broadly distributed item given away to anybody who wants it is a marketing expense and is not.
Real Life Examples
Scenario 1: The Holiday Gift to Clients
You decide to send a gift to clients for the holidays. The gift costs $75 per client. You can deduct $25 per client, and another $50 remains non-deductible.
Scenario 2: Branded “Swag” for a Conference
You order 200 tote bags personalized with a logo, planning to give them out at a conference or trade show. The total is $1000. These likely qualify as a marketing expense and are fully deductible without a $25 cap.
Scenario 3: Employee Gift Cards
As a bonus for their hard work, you give your employees each a $50 gift card to a local restaurant. These qualify as taxable wages rather than a deductible gift.
Conclusion
Corporate gifting is an important part of business, but the tax rules surrounding it can often be complicated or confusing. The most important takeaway is the $25 rule of business gifts. Exceptions exist, but are predictable as long as you know the basic rules of corporate gifting listed in this article. Gifts above $25 are typical, and perfectly fine to send; the only thing you need to know is that only $25 will be deductible. Keeping records of gifts you send as a business will make your tax-filing experience simpler.
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FAQs
1. Is the $25 business gift deduction limit per person or per gift?
The $25 limit is a limit applied to each individual recipient, per year.
2. Are gift baskets tax deductible?
Yes, so long as they are under the $25 gift tax deduction limit.
3. Can I deduct gifts to my employees?
Yes. However, there are important distinctions between physical gifts and cash. Cash is typically treated as taxable wage, while a gift is not.
4. Do gift cards count as business gifts?
It depends on your recipient. To clients, they are considered gifts. To employees, they are considered taxable wages as if they were cash.
5. What records do I need for business gifts?
Keep records of things such as the recipient’s name, cost, date sent, relationship with the recipient, and business purpose for the gift.
