We are often asked if the costs associated with gift giving are deductible.
The good news is business owners can deduct all or part of the cost if they give gifts in the course of their trade or business. However, there are some limits and rules for deducting the cost of these gifts.
Business owners cannot deduct more than $25 for business gifts they give directly or indirectly to a person during a tax year.
If a business gives a gift to an employee’s family member, the gift is an indirect gift to the employee. This being said, the rule does not apply if you have a legitimate, independent business connection with that family member and the gift is not intended for the employee’s future use.
When both spouses are business owners, any gifts given to an individual are combined. They are combined regardless if they own separate businesses or have a separate connection with the recipient.
Indirect gifts are a little different. If you gift to your own business that will be for the personal use or benefit of a person or a limited group of people, this is an indirect gift.
Secondary Costs
Secondary costs are not included in the cost of a gift due to the purposes of the $25 limit. A cost is considered secondary or incidental if it does not add value to the gift. Examples of secondary costs are: packaging, mailing, and engraving.
Gift Exceptions
Due to the purposes of the $25 limit, the following items are not considered gifts:
- Identical items such as pens, desk sets, bags, and cases to be widely dispersed and cost $4 or less with your name permanently imprinted on them are not gifts.
- Any marketing and promotional items, signs or display racks to be used at your business are not gifts.
