Can You Write Off Gifts to Clients on Your Taxes?

Businesses often provide gifts to clients to cultivate relationships and express appreciation. While these gestures are common business practices, their tax deductibility is subject to specific rules and limitations. Understanding these regulations allows businesses to properly account for these expenses and maximize available deductions.

Defining Business Gifts

For tax purposes, a business gift is an item given to a client or business associate to foster goodwill or promote business. The primary intent is to establish or maintain a business relationship, distinguishing it from entertainment expenses, which have stricter deductibility rules. However, packaged food or beverages intended for a customer’s later use are treated as gifts.

A business gift must be “ordinary and necessary” for the trade or business, meaning it is common in the industry and helpful for developing the business. Examples include gift baskets, holiday presents, or promotional items. For a gift to qualify for a tax deduction, it must be a physical item. Cash or cash equivalents, such as gift cards, are not considered deductible business gifts for clients.

Applying Deduction Limits

The deduction for business gifts is subject to a specific annual limit per recipient. Taxpayers can deduct no more than $25 of the cost of business gifts given directly or indirectly to each person during the tax year. If multiple gifts are given to the same person, the total deduction for that person is still capped at $25. For instance, if a $100 gift is given, only $25 of that amount is deductible.

Certain incidental costs associated with a gift do not count toward this $25 limit if they do not add substantial value to the gift. These include expenses such as engraving, gift-wrapping, packaging, shipping, handling, and sales taxes. Additionally, some items are exempt from the $25 per-person limit. Promotional items costing $4 or less that have the business name permanently imprinted on them and are widely distributed are fully deductible. These items, like pens or notepads with a company logo, are considered advertising expenses.

The $25 limit applies to both direct and indirect gifts. If a gift is given to a member of a client’s family, it is considered an indirect gift to the client and counts toward their $25 annual limit. If a gift is given to a company but benefits specific individuals, it is treated as an indirect gift to them. When a married couple receives gifts from the same business, they are treated as one recipient for the purpose of the $25 deduction limit.

Essential Record Keeping

Accurate and timely record keeping is important for substantiating business gift deductions. Taxpayers must maintain detailed records to prove the business purpose of the gift and its associated costs. These records are necessary for tax compliance and can be requested in the event of an audit.

Specific information that should be documented for each business gift includes its cost, a clear description of the item, and the date it was given. Also record the business purpose for giving the gift, such as “holiday appreciation” or “client goodwill.” The name of the recipient and their business relationship to the taxpayer must also be noted. The Internal Revenue Service provides guidance on these requirements in publications like IRS Publication 463, which details rules for travel, gift, and car expenses.