During the holiday season, your company may want to give gifts to valued customers, as well as some or all staff members. Can you claim any tax deductions for gifting holiday cheer? The short answer is “yes.” But you need to observe several IRS rules that limit write-offs — and, in some cases, eliminate them.
Beware the $25 Rule
For starters, deductible business gifts to customers must be tangible items, such as gift baskets, fruit platters and bottles of wine. In general, you should be able to physically pick up the item. You can’t deduct the cost of gift cards, gift certificates, cash or any kind of cash equivalent. Although event tickets were partially deductible in the past, businesses can no longer deduct the cost of gifted tickets to sports, music, theater or similar entertainment events.
Also know that the usual deduction for business gifts is limited to a relatively small $25 per recipient. So, if you give a customer a $100 box of Belgian chocolates, the allowable deduction is only $25. (Note that the $25 deduction limit hasn’t changed since 1962!) Furthermore, the limit doesn’t include shipping and handling. According to the IRS, these “incidental costs” don’t count toward a deduction. The same goes for gift-wrapping, engraving and sales taxes.
Also be careful about indirect gifts. You aren’t allowed to claim a deduction for a gift card given to a customer’s spouse, child or other relative. Attempts to bend IRS rules regarding gifts could result in penalties and are strongly discouraged.
But there’s one way to treat customers and receive better tax benefits. If you host a meal, you can deduct up to $25 per attendee. For example, a holiday lunch for 10 customers might cost $250. You’re typically allowed to deduct that full amount ($25 × 10). Note that if you’re the company’s owner and you attend the lunch, you can’t deduct the cost of your meal.
Making Gifts to Employees
Separate fringe benefit rules govern gifts to employees. There’s no $25-per-recipient limit for deducting gifts to staffers. However, under fringe benefit rules, employees may owe taxes on gifts of substantial value.
Generally, gifts of small value, called “de minimis benefits” by the IRS, are exempt from tax. This includes gifts, to quote the regulations, “the value of which is so small in relation to the frequency with which it is provided, that accounting for it is unreasonable or administratively impracticable.” Some examples are:
- Holiday turkeys or hams,
- T-shirts and coffee mugs with the company’s logo,
- Birthday cakes, and
- Flowers for employees who are ill.
Gift cards are generally taxable to employees who receive them. Other gifts that don’t qualify as de minimis fringe benefits are also subject to tax unless another statutory fringe benefit rule applies. (Consult your tax advisor for more information.)
What about gifts to independent contractors? Because contractors aren’t employees, they don’t qualify for statutory fringe benefits as outlined above. Instead, the rules for gifts to business associates usually apply. Your company must report taxable gifts to independent contractors —anything other than de minimis gifts — on Form 1099-NEC, “Nonemployee Compensation.”
Why Detailed Records Are Important
In light of the $25-per-recipient rule, the IRS could challenge a business deduction for holiday gifts that seems suspiciously high. So be sure to keep detailed records of your gifts. For each item, your records should note:
- Its cost,
- A description of the gift,
- The date of purchase,
- The date you gave it,
- The recipient’s name and business relationship, and
- Your reason for giving the gift.
These records will come in handy when you file your company’s 2023 tax return next year.
Navigating Tricky Rules
The rules for deductible gifts to customers and employees alike can be tricky for businesses to navigate. If you have questions, contact your professional tax advisor for answers.