Are Gift Cards a Tax Deductible Expense?

The tax deductibility of a gift card is not a simple yes or no question. Its treatment depends entirely on the recipient and the purpose of the gift. Whether given to an employee, a business client, or a charity, the context dictates the specific tax rules that apply for the business making the gift.

Deducting Gift Cards Given to Employees

When an employer gives a gift card to an employee, the Internal Revenue Service (IRS) views it as a cash equivalent, not as property. This classification prevents the gift card from qualifying as a de minimis fringe benefit, which is a perk with so little value that accounting for it would be impractical. Examples often include occasional snacks or holiday gifts of low-value property, like a turkey.

A gift card has a readily ascertainable value, making it a form of cash compensation. The full face value of the gift card must be included in the employee’s taxable wages and is subject to federal and state income taxes, as well as Social Security and Medicare tax withholding.

For the business, this means the entire value of the gift card is deductible as employee compensation, just like regular salary or bonuses. This requires the employer to report the amount on the employee’s Form W-2.

Deducting Gift Cards Given to Business Clients

The rules change significantly when providing gift cards to non-employees, such as clients, customers, or vendors. In this context, the expense falls under the category of business gifts. The IRS imposes a limit on the deduction for business gifts, allowing a business to deduct a maximum of $25 per person, per year.

If a company gives a $100 gift card to a client, the business is only permitted to claim a $25 deduction for that expense. The remaining $75 is not deductible. This rule is applied on a per-recipient basis annually.

Deducting Gift Cards Given to Charities

Donating gift cards to a qualified charitable organization is treated differently from gifts to employees or clients. The IRS generally considers it a cash contribution, which allows the donor to deduct the full face value of the gift card, provided the donation is made to a qualified 501(c)(3) organization.

To claim the deduction, the donor must maintain proper records of the contribution. For any single cash contribution of $250 or more, the donor must obtain a contemporaneous written acknowledgment from the charitable organization. This proof of donation must be in the donor’s possession before filing their tax return.

The acknowledgment must state the amount of the cash contribution and whether the organization provided any goods or services in exchange for the gift. If no goods or services were provided, the letter should state that.

Required Tax Reporting and Recordkeeping

Proper documentation is necessary to support the tax treatment of any gift card expense. For gift cards given to employees, the value must be included in their income and reported on their Form W-2 in Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages and tips).

When giving gift cards to business clients, meticulous recordkeeping is needed. A business must keep records detailing the name of the recipient, the date of the gift, the amount, and the specific business purpose. This documentation is essential for tracking the $25 annual deduction limit per person.

For charitable donations of gift cards, the required records include the purchase receipt for the gift card to prove its value and the date of the contribution. If the gift card’s value is $250 or more, a formal acknowledgment letter from the qualified charity is required, which must be obtained before filing the tax return.