Can You Write Off Gift Cards to Clients?

Business deductions are a fundamental aspect of tax compliance, allowing companies to reduce their taxable income by accounting for legitimate business expenses. Understanding these rules is important for maintaining accurate financial records and ensuring adherence to tax regulations. For many businesses, client relationships are fostered through various means, including gift-giving. Correctly classifying and documenting these expenses, particularly when involving gift cards, is important for both financial transparency and tax reporting.

Understanding Tax Deductions for Business Gifts

Businesses frequently provide gifts to clients and associates to cultivate goodwill and strengthen professional relationships. For a gift to be considered tax-deductible, it must meet specific IRS criteria. Generally, the gift must be an “ordinary and necessary” expense for the business, meaning it is common and helpful in the trade or business. The primary purpose of the gift should be to promote the taxpayer’s business or maintain a good business relationship.

Internal Revenue Code Section 274(b) establishes rules for deducting business gifts. It is important to distinguish a business gift from other expenses like compensation or entertainment. While compensation is payment for services, and entertainment expenses (such as event tickets) are generally no longer deductible under the Tax Cuts and Jobs Act of 2017, a business gift is an item given without expecting something of equal value in return. The IRS considers gifts to be tangible items, such as gift baskets or physical products.

Determining the Deductible Amount

The specific monetary limitation for deducting business gifts is generally capped at $25 per recipient per year. This $25 limit applies to gifts given directly or indirectly to an individual. For instance, if a business gives a client a gift costing $100, only $25 of that amount is deductible. This limit applies per person per year, not per gift; multiple gifts to the same individual throughout the year cannot exceed a total deduction of $25. Incidental costs associated with a gift, such as engraving, packing, shipping, or gift wrapping, do not count towards this $25 limit if they do not add significant intrinsic value to the gift.

However, gift cards and cash equivalents are generally not considered deductible as business gifts by the IRS. The IRS views gift cards as cash equivalents, making them taxable income for the recipient and typically not deductible for the business under gift rules. This contrasts with “de minimis” fringe benefits, which are small-value items provided infrequently that are impractical to account for, such as occasional snacks. Cash and cash equivalents, including gift cards, do not qualify as de minimis benefits because their value is readily ascertainable.

Exceptions exist where gift cards might not fall under the strict “gift” category. If a gift card is given as an employee achievement award, employee achievement awards are for length of service or safety achievement and must be tangible personal property. If a gift card is provided as compensation for services or as a referral payment, it is typically fully deductible as a business expense, but it would then be considered taxable income to the recipient and may need to be reported on tax forms like Form 1099-NEC for independent contractors.

Record Keeping for Gift Card Deductions

Maintaining comprehensive records is essential to substantiate any business deduction, including those related to gift cards. For each gift, taxpayers must keep records clearly proving the cost, date given, and a description of the item. This documentation provides evidence of the expense in case of an IRS inquiry or audit.

Beyond basic details, records should also include the business purpose for the gift and the business relationship to the recipient. For example, noting that a gift was for client appreciation or a referral thank-you helps justify the expense. Businesses should keep receipts and invoices for all gift purchases and maintain a log or register detailing all gifts provided to clients throughout the year.

Reporting Business Gift Expenses

After accounting for deductible business gift expenses, the next step involves reporting these amounts on appropriate tax forms. There isn’t a specific line item solely for business gifts; instead, these expenses are typically included within broader categories.

For sole proprietors, business gift expenses are generally reported on Schedule C (Form 1040), Profit or Loss From Business. These deductible amounts are usually included on Line 27a, “Other expenses,” in Part II of Schedule C. In Part V of Schedule C, the taxpayer can write “business gifts” and list the total deductible amount. For corporations filing Form 1120 or Form 1120-S, business gift expenses are typically reported in the “other deductions” section or a similar category on the main form.