The holiday season is upon us. Even if we aren't following traditions of the season, giving gifts to clients and employees makes everyone involved feel good. Gifts that range from flower arrangements to gift cards to personalized trinkets will all leave a lasting impression on the receiver and as well as the giver. But with each gift comes a hidden cost - the IRS's rules for what is deductible and how to list it on your tax return.
If you give gifts in the course of your trade or business, you can deduct all or part of the cost. Following are the limits and rules for deducting the cost of these gifts.
Your company can deduct no more than $25 for business gifts you give directly or indirectly to each person (employee or otherwise) during your tax year.
If your company gives a gift to a member of an employee’s family, the gift is generally considered to be an indirect gift to the employee. This rule doesn’t apply if you have a bona fide, independent business connection with that family member and the gift isn’t intended for the employee’s eventual use.
If you and your spouse both own companies and give gifts to an individual, your gifts are combined. It doesn’t matter whether you have separate businesses, are separately employed or have an independent connection with the recipient.
A gift to your company that is intended for the eventual personal use or benefit of a particular person or a limited class of people will be considered an indirect gift to that particular person or to the individuals within that class of people who receive the gift.
Incidental costs, such as engraving, packaging, insuring and mailing, are generally not included in determining the cost of a gift for purposes of the $25 limit. A cost is incidental only if it doesn’t add substantial value to the gift.
The following items aren’t considered gifts for purposes of the $25 limit:
• An item that costs $4 or less and has your name clearly and permanently imprinted on the gift, and is one of a number of identical items you widely distribute. Examples include pens, desk sets and plastic bags and cases.
• Signs, display racks or other promotional material to be used on your business premises.