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How to Navigate the Tax Rules for Business Gifts

Business gift giving is a way to say thank you to customers, suppliers, and employees, and to show your appreciation for the business relationship. Do you know how to treat gifts for tax purposes? Here’s an overview.

Gifts to non-employees

The general rule is you can deduct up to $25 of the total cost of business gifts you give to any person in any year. You may choose to spend more, but only the first $25 is deductible.

There are exceptions. For example, the cost of gift wrap or engraving is not included in the $25 limit. Also, low-cost (less than $4) pens or other promotional items engraved with your company name are fully deductible.

Knowledge check: You’re so pleased with the advertising brochure a copywriter created for your business that you include an additional $200 with the invoice. Is the bonus a gift?

The answer: Gifts are given out of affection, respect, or similar impulses. In this case, you’re paying a bonus for services. The copywriter has income. You have advertising expense.

Gifts to employees

You can give your employees food or other noncash items of nominal value and deduct the cost. These items are not considered income to your employees. But cash and gift certificates count as bonuses. Your company can deduct the expense for these items. The value is taxable compensation for employees.

Knowledge check: You surprise an employee with $25 cash for going the extra mile on a project. Is the money a gift or compensation?

The answer: Cash payments to employees are not treated as gifts, no matter the amount. Cash isn’t considered a de minimis nontaxable fringe benefit either. The $25 is compensation to your employee and wage expense for your business.

Please contact our office if you have questions about your business gift-giving plans.

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