Can You Write Off Client Gifts on Your Taxes?

Showing appreciation to clients through gifts can be a meaningful business practice, fostering goodwill and strengthening professional relationships. Businesses often consider these gestures as part of their operational expenses. However, the ability to deduct the cost of these client gifts on taxes involves specific rules and limitations set by tax authorities. Understanding these guidelines is important for businesses to properly account for such expenditures.

Understanding Deduction Limits for Gifts

Businesses can deduct the cost of gifts given in their trade or business, but strict limitations apply. The Internal Revenue Service (IRS) generally allows a deduction of no more than $25 for the cost of business gifts given directly or indirectly to any one person during the tax year. This $25 limit applies per recipient.

When a gift is given to a client’s family member, it is typically considered an indirect gift to the client and counts towards that individual’s $25 annual limit. If a married couple receives gifts, and there is a business connection with both spouses, the limit doubles to $50 if the gift is intended for both. Incidental costs associated with the gift, such as engraving, packaging, shipping, or insuring, are generally not included in the $25 limit if they do not add substantial value to the gift itself. For more details, businesses can refer to IRS Publication 463.

Distinguishing Gifts from Other Business Expenses

For tax purposes, the IRS defines a “gift” as an item given out of goodwill or generosity, distinct from compensation or payment for services. This distinction is important because different types of business expenditures have varied tax treatments. For instance, gift cards or cash equivalents are typically not treated as deductible business gifts but rather as taxable income to the recipient.

Promotional items, such as pens, calendars, or mugs bearing the company logo, are treated differently from gifts. These items are widely distributed and have a clear advertising purpose, making them generally fully deductible as business expenses, not subject to the $25 gift limit. To qualify, promotional items must cost $4 or less, have the business name permanently imprinted, and be part of a group of identical items widely distributed.

Gifts must also be differentiated from entertainment expenses. Following changes introduced by the Tax Cuts and Jobs Act (TCJA), most business entertainment expenses are generally not deductible. For example, taking a client to a sporting event is typically considered a non-deductible entertainment expense, whereas sending a gift basket to their office is classified as a gift. If an item could be considered either a gift or entertainment, it is generally treated as entertainment and thus non-deductible.

Required Record Keeping for Deductible Gifts

Maintaining thorough and accurate records is important for substantiating all claimed business deductions, including client gifts. Without proper documentation, the IRS may disallow the deduction upon audit. Therefore, businesses should keep detailed records for each gift to support their tax filings.

For each deductible gift, the following information must be recorded:
The cost of the gift and the date it was given.
A clear description of the gift is also necessary.
The business reason for giving it, such as building client relationships or thanking a client for a referral.
The name of the recipient, and information establishing their business relationship to the taxpayer, must be documented.
These records can be maintained through various methods, including keeping physical receipts, utilizing detailed expense logs, or entering information into accounting software.