G is for Gift Expenses.
The word gift can have a different meaning, depending on who is doing the giving and who is doing the getting. If you don’t believe me, check out an episode or two of Judge Judy (yes, I’m a fan).
When it comes to business, however, the IRS has a very clear idea of what constitutes a gift for purposes of expenses. Generally, if you provide an item to a customer (or a customer’s family) without an expectation of payment or compensation, that’s a gift. And assuming that it’s a gift made in the course of trade or business, even if you are just an employee, you may be able to deduct all or part of the cost as a business expense. There are, however, a number of caveats and limitations:
The IRS limits the amount that you can deduct for gifts: you can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year.
When figuring out what constitutes a “person” for this purpose, keep in mind that a gift to a company that is intended to benefit a particular person or a limited class of people will be considered an indirect gift to that person or to the individuals in that class. So, for example, if you send a gift to the marketing department at Company A, then the individuals in that marketing department are considered persons for purposes of the rule, not the entire company.
If you give a gift to a member of a customer’s family, the gift is generally considered to be an indirect gift to the customer. So, a birthday gift for the spouse of your best client is considered a gift to your client for purposes of determining limits on deductibility. If, however, you have a bona fide, independent business connection with the family member, and the gift is intended for the family member and not for a customer, that rule doesn’t apply.
For tax purposes, if you and your spouse both give gifts, both of you are treated as one taxpayer. It does not matter whether you have separate businesses, are separately employed, or whether each of you has an independent connection with the recipient. Similarly, if a partnership gives gifts, the partnership and the partners are treated as one taxpayer.
Incidental costs, such as engraving on jewelry, gift wrapping, and mailing, are generally not included in determining the cost of a gift for purposes of the $25 limit. Additionally, when figuring the total of your gifts, you can exclude from the total an item that costs $4 or less, has your name clearly and permanently imprinted on the gift, and is one of a number of identical items you widely distribute. So, yes, that means that you don’t count the cost of promotional items like pens, golf balls, and tote bags.
Gifts that serve a dual purpose, like tickets to events and performances, are more complicated. Any item that might be considered either a gift or entertainment generally will be considered entertainment for tax purposes. If you go with the customer or client, it’s considered entertainment. If, however, you do not go with the customer to the performance or event, you can choose to treat the cost of the tickets as either a gift expense or an entertainment expense, whichever makes the best tax sense.
Note that these rules apply to gifts made to customers and clients. You must be careful, though, since the IRS routinely classifies items given to employees by employers as compensation and not as gifts.
