As a company owner, you understand the value of growing and maintaining connections with essential customers, suppliers, and industry contacts.
Giving business presents is a tried and true method of improving company ties.
Yet, taxes can be a lot to digest, and not knowing if a gift can be used as a deductible business expense or not can be confusing.
We have created this guide to clarify a few things for you and help you make the most of your gift-giving.
In our post, we’re discussing the below elements:
- What qualifies as a business gift?
- What business gifts are tax deductible?
- What business gifts are not tax deductible?
- Gift ideas for tax-deductible gifts to give to employees and clients
- Writing off business gifts
- How to make employee gifts not deductible for tax purposes
- Top seven audit survival strategies
Let’s get reading.
Table of Contents
What Qualifies as a Business Gift?
The Internal Revenue Service (IRS) defines a ‘business gift’ as a gift given in the course of business.
To illustrate, the Internal Revenue Service (IRS) is the United States of America’s tax administrator and collector. It’s also a division of the Treasury Department.
In July of 1862, Congress created the Office of the Commissioner of Internal Revenue inside the Department of the Treasury.
According to the IRS, business gifts are restricted to $25 per person/customer if they work for a government agency (such as a municipality or the post office).
This restriction doesn’t apply to a non-governmental organization or corporations, however.
Additional gift upgrades are also tax-deductible for companies.
For example, if you custom engrave a piece of jewelry for a customer, you can deduct the engraving cost.
In addition, employee gifts are restricted, yet they are usually tax deductible.
Which Business Gifts are Tax Deductible?
To start with, there’s a distinction between tax-deductible and tax-exempt.
The required gift tax does not apply to various donations, such as those sent to your spouse, political groups, for another person’s education or medical expenses, or any other contributions that do not exceed the yearly exemption value of $15,000 per recipient.
As a result, there’s no need to be concerned about paying a gift tax on your family members’ Christmas gifts.
However, tax-deductible is not the same.
In general, gifts are not tax deductible.
In reality, only two types of presents may be claimed on a tax return: charitable contributions and corporate gifts.
Let’s take a quick look at each of them:
Charitable contributions are exactly what they sound like: gifts given to a non-profit organization to assist them in carrying out their goal.
Any charitable contributions you make are tax-deductible (if the charity qualifies).
For contributions to be tax-deductible, a charity must be a registered 501(c)3 organization in good standing.
A 501(c)(3) organization is philanthropic, religious, educational, academic, literary, tests for public safety, supports national or international amateur competitive sport, or eliminates cruelty to children or animals.
In addition, business gift expenses are either paid for by your company or given on its behalf, and some of them can be tax deductible to a certain extent, depending on how you manage and report them.
Here are a few examples of presents that might be considered business gifts:
- Have your business name printed on them.
- Cost less than $4 per piece to produce.
- Are widely distributed (not just to one or two clients).
Concerts, vacations, tickets to sporting events, and dinners can be considered entertainment and business expenses that are tax-deductible (up to 50% of their value).
All other contributions are tax-deductible up to a maximum of $25 per year.
Hence, the first step is to assess what kind of present you are giving or receiving and whether it is tax-exempt or a deductible.
This brings us to an important point: if a tax is applied, how much should it be?
What is the Amount of the Gift Tax?
The IRS levies a gift tax when you transfer money or property to another person.
A gift tax may be triggered by parents giving money to their children or handing a car to a newly licensed adolescent driver.
A few things can determine whether or not a gift tax applies to the dependant:
- The gift must be less than the gift tax cut, which is $15,000 in 2020
- A lifetime exclusion of $11.58 million is available to a select group of affluent people
- In almost every case, the donor, not the beneficiary, is liable for taxes
However, a gift tax is not applied, provided the giver stays below the annual or lifetime threshold.
When a donation exceeds the annual or lifetime exclusion, the donor must submit tax forms disclosing the total amount of the contributions.
Moreover, the IRS responds by taxing you on the value of the gifts at rates ranging from 18-40%.
Which Business Gifts are Not Tax Deductible?
Donors can make their lives simpler by remaining under the annual and lifetime gifting limits for individuals; businesses are subject to the same regulations.
The IRS monitors company gifts to ensure they are legitimate and properly deducted.
Hence, if your company sends out a lot of presents (or any gifts), keep detailed records.
Regardless of the present you give, keep track of it and ensure you only deduct what you’re authorized to on your tax return.
Moreover, paying additional taxes (or even fines) for deducting a gift that you shouldn’t have might be troublesome and could even lead to tax debt issues in the long term.
The following gifts are often free from gift tax:
- Any present for a spouse who is a citizen of the United States
- Anything provided to a dependant
- Donations to charity
- Political contributions
- Funds are given to educational institutions directly
- Direct payments to medical service providers or health insurance providers
On the other hand, cash, checks, property, and even interest-free loans are all examples of taxable gifts.
In addition, restrictions apply to anything sold for less than its fair market worth.
4 Tax Deductible Gift Ideas for Employees and Clients
When it comes to incidental costs, gift-giving costs of $4 or less don’t count against the $25 maximum deduction limit and are treated as if they’re business cards if they fulfill both of the below criteria:
- The present has your company’s name
- You deliver many identical items of the same gift
To make your life easier, the below examples of gifts make great office supplies, can be given in bulk, and are under four bucks.
Also, these gift-limit-friendly items will rock your company name and logo.
1. Mobile Office Pencil Pouch
The mobile office pencil pouch is great for keeping all your supplies at hand.
When unzipped, the pouch lies flat for convenient access to your writing necessities.
2. Nash Gel Stylus Pen
This Nash gel stylus pen is a twist-action ballpoint pen with a soft rubber stylus for smartphones and tablets.
It also has an incredibly smooth black gel ink cartridge, a colorized rubber grip, and a 0.7mm pen tip.
3. Portfolio for Tablets
The interior panel of the Ebony portfolio for tablets has two pairs of elastic corner straps for carrying tablets, mini-tablets, and e-readers.
It also has a refillable notebook with 30 ruled sheets and an elastic pen loop.
4. Round Badge Holder
The Bullet round badge holder has a retractable cable that measures 32″.
It includes a belt clip on the rear and is ideal for tradeshows and employee badges.
This round-shaped badge holder can also be used as a key ring holder, making it very versatile.
Writing off Business Gifts
If you’re a small business owner, new to the field of business, or self-employed, you may need to know the following.
Accurate records, as with other aspects of your taxes, are essential.
If you wish to get a tax write-off, you must be able to show the IRS what you purchased:
Keep note of the following details while documenting your company’s presentations for the year:
- Cost of the gift or its substantial value
- Description of the gift
- The business purpose of the gift
- When you bought the gift
- Whom you are delivering the gift to (i.e. a business entity, client, or employee, depending on what your business relationship or connection is)
Furthermore, remember that married couples are not permitted to provide different presents to the same customer.
If entrepreneurial couples conduct separate business with the same customer, only one can deduct the thank-you gift on their taxes.
Tips to Follow When Choosing Your Employee Gifts
Employers can give their workers anything they want as a present, but it’s crucial to understand the tax ramifications.
Employers often avoid providing an employee a present subject to significant taxes without the employee’s knowledge.
Therefore, keep these things in mind when choosing your employee gifts:
1. Consider the cost
The monetary value of the direct gift can influence how it is taxed.
Generally, any monetary present – whether an annual bonus or a gift card to a restaurant – is considered income tax and must be reported when the employee files their taxes.
Tangible things with a low financial value are subject to a tax provision known as the “de minimis fringe benefits.”
Employers can send presents to their workers with no tax consequences and as a fully deductible tax item under this provision.
To qualify as a “de minimis fringe” benefit present, the employer must provide the gift rarely and at such a low fair market value (FMV) that public accounting for the item becomes difficult.
2. Consider the item
Your employee must report cash or cash-equivalent presents as income.
If you want to reduce the tax consequences for your workers, use a physical present such as a book or flowers instead of money or a gift card.
Some examples of de minimis fringed presents include:
- Tangible holiday or birthday presents with a low monetary worth
- Physical rewards for exceptional job performance
- Employee meetings or activities that are seldom held
3. Identify the reason
Awards are one instance in which firms may offer their workers cash or cash equivalent presents with no tax time repercussions.
Employee achievement, service, and safety awards are not taxed to a specific sum.
In addition, the reward must fulfill several IRS requirements, but if it is less than $400, you as the employer may deduct the expenditure from your taxes, and the employee does not have to report the award as taxable income.
Q: How can I recognize staff accomplishments?
Determine whether you want to honor taxable or tax-free successes to workers to assist you to limit the sort of present you offer them.
Cash, a vacation, food, housing, sports tickets, or stocks are all examples of taxable achievement rewards.
Also, employees are subject to additional regulations regarding tax-free achievement rewards. The following are some rules for tax-free achievement awards:
- The reward is a piece of tangible personal property
- You provide it in exchange for the duration of service or safety
- You give it as a noteworthy prize
- The reward is comparable to a qualifying plan award
Q: What exactly are “occasional gifts”?
Occasional presents are items that are presented at random and on no defined timetable.
A corporation may give away presents regularly throughout the year to celebrate performances, special events, or holidays.
In addition, occasional incentives are goods with a single use, such as a cooking class certificate or sporting event tickets worth less than $100.
4. Speak with your accountant
If you are concerned about the tax consequences of a proposed gift for your employee or workers, get advice from your accountant or tax attorney.
Now Over to You
It’s always a great idea to celebrate your customers and high-performing staff members with thoughtful gifts, but when you must always pay attention to taxes, it can be a bit stressful.
Instead, focus on developing long-term connections with your clients and adequately compensating your employees.
We always have your back in case you need further advice or are interested in getting your hands on the trendiest business gifts.
Feel free to reach out anytime.
Thank you for reading!