Deduct Gifts to Clients?

As the calendar year winds down, two key motivations drive business owners to consider client gifts: 

•  The approaching holiday season provides an opportunity to foster goodwill, showing clients appreciation for their loyalty. 

• With tax season on the horizon, many business owners look for ways to trim taxable income through allowable deductions. 

Tax law permits deductions for client gifts, but there is a limit. Regardless of the total spent, only the first $25 of each gift given to any one person—directly or indirectly—may be deducted annually. To clarify, if a gift is given to a client's family member without a direct business relationship, it’s considered an indirect gift to the client. 

Example: 

Take Michael, who owns a winery. He gifts a $30 bottle of wine to Emilio, his loyal client, and a $20 sweatshirt to Emilio’s son, Raul. Because Raul has no direct business relationship with Michael, the sweatshirt is deemed an indirect gift to Emilio, meaning Michael can only deduct $25 for the wine and nothing extra for the sweatshirt. 

 However, incidental costs, such as engraving, wrapping, or packaging, don’t count toward this limit if they don’t add significant value. For example, Michael sends Margarite a $30 engraved goblet as a token of gratitude; the engraving and delivery cost $10. Michael can deduct $25 for the goblet and an additional $10 for incidental expenses. 

A gift must be tangible to qualify, so baskets, wine, or similar physical items are deductible, but cash or gift cards are not. Promotional items with a cost under $4 (like pens or key chains) are also exceptions to the $25 cap. 

Maintaining meticulous records is essential. For each gift, document its description, cost, date, purpose, and recipient’s relationship to the business. These records are invaluable if the IRS requests verification of your deductions. 

If you are still unsure about your situation and want help, you can click this link to set an appointment to speak with an expert at Lisa Brugman, EA & Associates.