Give a business gift, get a write-off
OK, maybe it is better to give than to receive. But when it comes to taxes, it's definitely better to give business gifts than personal gifts.
Here's why: Business gifts can be deducted against your taxable income. And in some cases, what might be thought of as a gift might even be an ordinary — and fully deductible — business expense. More on that below.
The $25 rule
The first thing to remember about business gifts is the $25 rule: You can deduct up to $25 in business gifts to any one taxpayer per year. That means if you give a $45 business gift to someone, your deduction is limited to $25. If you make gifts of two items worth $10 and $15 during the year to one person, you get to deduct $25.
There's no limit on how many people can receive business gifts during the year. However, for tax purposes, a husband and wife are considered to be one taxpayer, so only $25 in total gifts to the two of them can be deducted.
Oh, and just to complicate things a bit more, that rule also applies to gift givers as well as recipients — you and your spouse also are treated as one taxpayer. So even if you each have your own businesses, the two of you combined can't take a deduction for more than $25 in gifts to any individual.
The entertainment exception
Business gift-giving gets more complicated when you give a client something like tickets to a concert or a football game. Sure, it's a gift . . . but it's also entertainment. So how do you treat it for tax purposes?
The IRS gives you lots of leeway on this. If you go to the event with the person, then it's probably a business entertainment expense. That means no $25 limit, but you only get to deduct 50% of the total cost.
If you give the tickets and don't go with the client, you can choose whether to treat the expense as a gift or as entertainment. If the value of the item is less than $50, do yourself a favor and treat it as a gift.
That's not a gift; it's an incentive
The $25 limit on gift deductions is a real stranglehold in a time when box seats to a Red Sox game (in case anyone is wondering what to get me) can cost $75 apiece. But businesses, in some cases, have won fights to have expenses that might be thought of as gifts categorized instead as compensation or other fully deductible expenses.
In one case, a company took a deduction for a $1,455 set of golf clubs given to a salesman, only to have the IRS say that the clubs were a gift and only $25 could be deducted.
But the U.S. Tax Court decided that the clubs were actually a sales incentive, and that such incentives were ordinary and necessary in the company's business. Thus, the cost of the clubs was fully deductible, rather than being subject to the $25 gift limit.
Do you do it for love?
In other cases, a gift has been defined as something "given with detached and disinterested generosity," says Vern Hoven, a CPA in Gig Harbor, Wash.
"You know, that's about the best definition of love I've ever heard — giving something from your heart without expecting to receive anything in return," Hoven says. "But let me ask you, what kind of a business would do that?"
His point: The things that businesses often "give" (such as year-end bonuses to employees, awards or trips to outside salespeople, store certificates to clients) are not disinterested gifts. They are often connected to rewarding people for past business, encouraging them to provide future business or promoting current business.
"The expense might be promotional or advertising-related or marketing or compensation, but if the motive for it is business-related, then it's probably not a gift," Hoven says. No gift, no $25 limit on the deduction.
That doesn't mean the road is clear for handing out big-ticket, year-end "thank yous" and incentives. For one thing, a gift of a meal is still a meal — not a "promotional item." For another, in an audit you could still well find yourself having to defend your characterization of these expenses. And you'll always have to show that the expense was ordinary and necessary in your business. There have been many court cases about expenses that may or may not have been gifts, and that means the IRS is prepared to fight any perceived abuses in this area.
For an introduction to the official rules on business-gift deductions, check out IRS Publication 463. For more information, talk with your tax professional.