When Are Business Gifts Taxable?
- August 2, 2015 | Jessica Sillers
Business owners buy gifts for a number of reasons. Thank-you gifts or holiday presents can keep relationships with customers or professional associates strong. While gift-giving is a common business practice, it doesn’t fall into the same “ordinary and necessary” deduction category as many other business expenses come tax season. Knowing what’s deductible and what’s not can help you stick to your budget goals.
Read on for signs that your business gift comes with a tax price tag.
The Magic Number Is $25
The IRS sets a $25 cumulative cap on gift expense deductions per recipient per year. If you send a $10 bottle of wine to congratulate a customer on her new home, you have $15 left for her holiday gift. If you go over, you’ll pay taxes on the remainder.
Sounds simple, but knowing the exceptions can help you make the most of your money. Incidental gift costs, like shipping or gift wrapping, don’t count toward the $25 limit. Your CPA will be able to advise you on whether incidental costs are deductible elsewhere, for instance as an ordinary business expense. Remember, though, that incidental costs can’t add much value to the main gift. Springing to have initials engraved on an elegant watch is incidental. Choosing a glass vase over the standard plastic wrapping for a flower arrangement is not.
Company swag is another exception to the $25 limit. This is great for business owners attending a lot of conferences. Imagine if you had to keep careful record to deduct every pen or mini soccer ball you handed out! The rules for these promotional gifts are:
- Each item must be worth $4 or less
- Items must be marked clearly and permanently with your company name
- Items must be part of a collection of identical pieces that you give out widely
Pens, desk calendars, and toys printed with your company name are good examples. If you’re a hotel owner thinking about giving out plush towels worth $12 each, those will have to be recorded as gifts.
Gifting as a Family Affair
Say your client has a family of five at home. Does $25 per person mean you actually have $125 of deductible cash to spend--a separate limit for each family member? In most cases, the answer is no. The IRS will expect proof that you have an independent business relationship with those other family members in order to claim a separate deduction. Otherwise, the $20 graduation gift for a client’s child counts as an indirect gift to the client him- or herself.
Employee Gifts? Tax 'Em!
Your relationship to your employees is inherently compensatory, so almost anything you give will count as a taxable expense, according to BizFilings. Whether you’re giving a cash bonus, a gift card, or even a material present like a coffee machine, the gift is a taxable wage as far as payroll tax is concerned.
Value doesn’t come into play with employees the same way it does with other business gift-giving. The IRS doesn’t have clear guidance on a $25 cap (or other amount) for employees. Until you hear otherwise from your CPA, it’s best to treat any employee monetary gift--even gift cards or gift certificates, which can be exchanged for cash--as taxable, even if it’s a nominal value or a Christmas present.
If you’re concerned about looking like Scrooge, don’t worry. The IRS does offer an employee gift-giving exception during the holiday season. The rules are that the gift must be an item (not money or a certificate) with nominal value. A pretty candle or a honey-baked ham likely fits this exception. Giving out the latest Apple gadget? In that case, make sure you run the gift through payroll so you withhold the appropriate taxes from employee pay.
Outside of Work, Off the Books
Events outside of work aren’t subject to the same tax rules, either. If your employee invites you to her wedding--first off, congratulations! Sounds like you have fantastic office camaraderie. Because the wedding is completely unrelated to your business, you won’t need to withhold taxes from the happy couple for the place setting you bought them.
Overall, it's best to assume gifts are taxable unless you hear otherwise. Understanding the above rules will help you take advantage of deductions, making it easier to keep the gifts and goodwill flowing.