Tis the season! Everyone is gearing up for the holiday season and looking forward to celebrating with colleagues, clients, and business connections. Catalogs and store advertisements are being released. Santa is making his list and checking it twice, and businesses should follow in his footsteps; holiday buying lists should be underway and checked twice to make sure they do not exceed the Internal Revenue Service’s annual gifting limit. The IRS has an annual limit on gift giving as it relates to clients, employees, and prospects. While this article may seem like it is taking all of the fun out of Black Friday shopping and painting accountants as Ebenezer Scrooge, the below information includes important details to help one’s organization properly prepare for the giving season.
What are the IRS rules relating to business gifts?
Giving gifts to customers and business associates is a common practice, especially around the holidays. However, gift deductions from a tax perspective are subject to certain limits. The IRS, as indicated in Publication 463, allows a company to deduct up to $25 for business gifts per individual during a tax year. Any amount exceeding this value that benefits a specific individual is nondeductible. Of course, businesses can spend as much as they want on a gift, but only $25 of the cost of the gift is deductible.
The $25 limit does not include incidental costs (costs that do not add substantial value to a gift), such as gift wrapping, packaging, shipping, insuring, or engraving; these would be considered office supplies.
Signs or other promotional items to be used on the recipient’s premise are also not considered gifts subject to the $25 limit.
Similarly, any item costing $4 or less that includes a company’s name, or has their logo permanently imprinted on it, and is one of several identical items given away also falls into the category of items that are not considered a gift subject to the limit. Instead, this should be considered a marketing and advertising expense. Examples of these promotional and nondeductible items could be pens, sticky notes, or other tabletop tchotchkes given away by your marketing or staff development teams with a company’s name or logo on them.
It is also important to note that if a gift is given to a business for use in its business (e.g. a technical manual), it would not be considered a gift and is therefore not subject to the $25 limitation. The $25 limit only applies to individuals and does not apply to a gift given to a business or for the benefit of an entire company, unless the gift is intended to only be given to a specific person within the company, such as the President. If a gift is made to a business, but specifically intended for a specific individual’s benefit or ownership, that gift would be considered as a gift subject to the limits.
After reviewing all of this, one might be thinking that they’ll save themselves the stress and plan on giving gift cards instead. The IRS lumps gift cards in as a cash equivalent and are subject to the same $25 limitation. Using one’s best judgment and budgeting wisely will help organizations find success this holiday season!
For specific questions or additional information, please contact David Blain or Lindsay Young. If you would like to talk to one of our professionals on any other business-related topic, please do not hesitate to contact a member of our Advisory and Business Consulting team.