The occasional business gift to a supplier or client helps maintain relationships and is a normal part of business operations. However, the Internal Revenue Services substantially restricts how much a business can deduct in business gifts. Since the IRS hasn't revisited the limit since it was established in 1954, the maximum amount a taxpayer can deduct for business gifts is still $25 per recipient.
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Business Gifts to Whom?
Goods given to customers, suppliers, vendors and business contacts are all generally considered business gifts. A gift basket given to a contact that made a referral or a bottle of wine to a customer who made a large purchase are typical examples of business gifts. However, gifts given to employees shouldn't be lumped in with business gifts.
Technically, goods given to employees are a form of compensation, and you owe payroll taxes on them. To avoid this issue, employers can instead give employees work-related gifts, like a new work laptop or a business trip, that are instead classified as business expenses.
Deducting Business Gifts
Technically, business gifts are tax-deductible, but the deduction is severely limited. The IRS only allows taxpayers to deduct the first $25 of gifts to each person per year. Gifts to the person's family members are counted as a gift to the person, so you can't get around the limit by buying an item for a client's wife.
However, the number of people you can give gifts to for business purposes is unlimited. For example, you could give 100 clients $25 gifts and deduct $2,500 in business gifts.
Exceptions to the Rule
The IRS does make exceptions to the business gift limitation, particularly if you're trying to promote your own products. An item is not subject to the $25 limitation if it costs $4 or less and has the company name on it or is a widely distributed identical item.
For example, you could give various clients an unlimited number of notepaper pads or pens even if they don't bear your company name, since these are widely distributed items. Any signs, display racks, or promotional materials for your company given are also excluded, regardless of cost. More specifics can be found in the IRS Publication 463, Travel, Gifts, and Car Expenses.
Reporting the Gift
Report any business gifts in the "deductions" section of the main form of your business tax return. There isn't a specific line item for business expenses on Form 1120, 1120S, 1065 or Schedule C, so write in "Business Gifts" in the "Other Expenses."
The cost you write in should be the cost of business gifts eligible to be deducted, not the total cost of business gifts. As with any business expense, keep copies of receipts to substantiate the expense in case the IRS comes knocking.
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