Give a Business Gift, Get a Write-off

Maybe it is better to give than to receive. And when it comes to taxes, it’s definitely better to give business gifts than personal gifts. 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.

You can deduct up to $25 in business gifts to any one taxpayer per year. 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.

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.

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, and no gift means 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 may 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!