With April 15th looming on the horizon, it is important to find out all you can about the costs of gifts and how they can be written off as part of your business expenses. The Internal Revenue Service has a number of guidelines that you need to be aware of around tax time to get the maximum refund you and your business deserves.
The IRS has a limit on how much you can deduct for gifts. The limit is $25 per person for each tax year, and the gifts can either be given directly or indirectly. Now the trick is here to figure out what constitutes a person. If for example, you give a gift of a food buffet to members of the sales department of a company, those persons who received the gift are considered the recipients, and not the company as a whole.
If you give a gift to a family member of a customer, that gift will be considered an indirect gift to your customer. But, if you have a business relationship with that person and that gift is intended only for the family member, that rule does not apply.
If you and your spouse both give gifts to a person or a company, you are considered one tax paying entity. The same concept applies for people who are in business as a partnership. Costs such as custom engravings on gifts, wrapping costs, and mailing costs are not considered part of the $25 limit by the IRS.
Items that are under $4 in cost such as pens, tote bags, and golf balls can be excluded from the $25 total. Gifts such as tickets to an entertainment event are a bit more complicated. If you also attend the event it is considered an entertainment expense. If you do not attend the event it is considered either a gift expense or an entertainment expense, and you’d have to do some research to find out which is the more logical deduction for your individual case.
Use these as a guideline, and it is much less likely you’ll get that dreaded letter in the mail from the IRS notifying you that an audit is in order for your business.