As a business owner, you know the importance of maintaining and strengthening your relationships with key customers, vendors and community contacts. One proven way of enhancing business relationships is the giving of business gifts. What are the tax rules for deducting business gifts? How does the tax law distinguish between business gifts and promotion, and are the tax consequences between the two different? In this Tax Update, we will explore these questions to assist you in avoiding some of the traps associated with taking these deductions.
First the basics, what are business gifts under the tax law? If you give gifts in the course of your trade or business or for the production of income to an individual, these constitute “business gifts”.
And what are the tax rules for deducting business gifts? The tax law states that you can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year. A gift to a 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. There is no limit to how many people you can give a $25 gift to.
If you give a gift to a member of a customer’s family, the gift is generally considered to be an indirect gift to the customer. 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 customer’s eventual use.
If you and your spouse both give gifts, both of you are treated as one taxpayer. It doesn’t matter whether you have separate businesses, are separately employed, or whether each of you has an independent connection with the recipient. If a partnership gives gifts, the partnership and the partners are treated as one taxpayer.
So now that we know what a business gift is, what constitutes a promotional expense? Promotional expenses and advertising expenses are lumped together under the tax law so we will combine them for our discussion. Promotional and advertising expenses are of a more general nature than business gifts which are given to specific individuals. Promotional and advertising items include: costs of creating materials and brochures, the cost of an automobile given as a prize to a lucky customer, expenses to exhibit products at shows and fairs, and taking out advertisements in a publication.
Promotion and advertisement expenses are not subject to a $25 limit and therefore are generally more beneficial than deductions for business gifts.
Sometimes an item appears to qualify under both definitions. For example, what if you give your main customer a year’s supply of some product. Is this a business gift or is it a promotional expense? It depends. If the product was part of a promotional campaign and your main customer just happened to win, the related cost would be a promotional expense not subject to the $25 limit. However, if the product is given to the customer because you value their business, then it would be subject to the business gift rules.
Another factor is that even though you give a potential client or customer a mini basketball, charger cord, drink holder, etc., if these items have your business name, are under $4 each, and they are one of many identical items, they are treated as an advertising expenses. Consequently, you can fully deduct the expense of these items, and you will not have to keep receipts. Now on the other hand if you give someone prepackaged food, flowers, game day tickets or chocolates, this would be considered a business gift expense and is subject to the $25 dollars or less limitation.
As you can see, if you are planning to make a business gift or incur promotional expenses, it is a good idea to consult with a qualified CPA who can assist in properly classifying each item, which may help you avoid an unpleasant surprise if Uncle Sam comes around!
BGBC Partners, LLP is a full service certified public accounting and business consulting practice.