If you give gifts in the course of your trade or business, you can deduct all or part of the cost. This chapter explains the
limits and rules for
deducting the costs of gifts.
$25 limit.
You can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax
year. A gift to a company that is
intended for the eventual personal use or benefit of a particular person or a limited class of people will be considered an
indirect gift to that
particular person or to the individuals within that class of people who receive the gift.
If you give a gift to a member of a customer's family, the gift is generally considered to be an indirect gift to
the customer. This rule does not
apply if you have a bona fide, independent business connection with that family member and the gift is not intended for the
customer's eventual use.
If you and your spouse both give gifts, both of you are treated as one taxpayer. It does not matter whether you have
separate businesses, are
separately employed, or whether each of you has an independent connection with the recipient. If a partnership gives gifts,
the partnership and the
partners are treated as one taxpayer.
Example.
Bob Jones sells products to Local Company. He and his wife, Jan, gave Local Company three cheese packages to thank them for
their business. They
paid $80 for each package, or $240 total. Three of Local Company's executives took the packages home for their families' use.
Bob and Jan have no
independent business relationship with any of the executives' other family members. They can deduct a total of $75 ($25 limit
× 3) for the
cheese packages.
Incidental costs.
Incidental costs, such as engraving on jewelry, or packaging, insuring, and mailing, are generally not included in
determining the cost of a gift
for purposes of the $25 limit.
A cost is incidental only if it does not add substantial value to the gift. For example, the cost of gift wrapping
is an incidental cost. However,
the purchase of an ornamental basket for packaging fruit is not an incidental cost if the value of the basket is substantial
compared to the value of
the fruit.
Exceptions.
The following items are not considered gifts for purposes of the $25 limit.
-
An item that costs $4 or less and:
-
Has your name clearly and permanently imprinted on the gift, and
-
Is one of a number of identical items you widely distribute. Examples include pens, desk sets, and plastic bags and cases.
-
Signs, display racks, or other promotional material to be used on the business premises of the recipient.
Gift or entertainment.
Any item that might be considered either a gift or entertainment generally will be considered entertainment. However,
if you give a customer
packaged food or beverages that you intend the customer to use at a later date, treat it as a gift.
If you give a customer tickets to a theater performance or sporting event and you do not go with the customer to the
performance or event, you have a choice. You can treat the cost of the tickets as either a gift expense or an entertainment
expense, whichever is to
your advantage.
You can change your treatment of the tickets at a later date by filing an amended return. Generally, an amended return
must be filed within 3 years
from the date the original return was filed or within 2 years from the time the tax was paid, whichever is later.
If you go with the customer to the event, you must treat the cost of the tickets as an entertainment
expense. You cannot choose, in this case, to treat the cost of the tickets as a gift expense.
