‘Tis the Season

Image showing gifts with the words "'Tis the Season - Gift Giving - Are Business Gifts Tax Deductible?"

It’s that time of the year again…

The season begins with a gratitude feast and many of us start thinking of all the things – and people – we’re thankful for. Often, we decide that we’d like to say “Thank You” with a gift. So the question arises – If a business owner gives a gift to a customer or a vendor, is it a deductible expense for the business?

According to the IRS, business gifts are deductible, but there is a limit of $25 per person per tax year. Do you feel like this limit is unreasonably low? From my Google research, I discovered that this limit was set in 1962 (over 60 years ago!) Adjusting for inflation, this is the equivalent of $227.80 in 2023. Put another way, $25 today buys what could have been purchased for $1.26 in 1962.

So, what can a law-abiding, but generous business owner do?

First of all, review the regulations and discuss the matter with your tax professional. (*Note: I am a bookkeeper, not a tax preparer.) Keep in mind that the issue is the deductibility of the gift. In other words, the IRS wants to make sure taxes are paid on anything over the limit.

Here are some strategies that satisfy the IRS requirement and still allow business owners to give gifts that cost more than $25:

  • As mentioned, the limit is $25 per person, so if you are giving a gift that will benefit more than one individual at a company, you can multiply $25 by the number of people who will benefit from the gift.
  • If you want to give a gift that exceeds the $25 per person limit, you can pay for the portion of the gift that exceeds the limit with personal funds. The cleanest way to do this is to literally pay with two different accounts – the business account for the $25 portion and a personal account for the amount over $25. However, if you would rather have your business pay the full amount, you can make an entry on your books to allocate the deductible portion to Gift Expense and the over the limit portion to the Owner’s Draw account. Whichever method you choose, your business will keep the $25 gift expense as a deductible business expense and you (the owner or the C-corp entity) will pay taxes on the amount that exceeds the limit. (If you pay with personal funds, you’re paying with money that has already been earned and taxed – money that you already paid income tax on. If you pay through the business, the amount that is counted as an Owner’s Draw will be included as part of your income for the current year.)
  • If the gift is for a vendor who regularly provides services for your company, you can give a gift and let the individual know that the value of the gift will be reported on the 1099 issued in January. This approach works best for cash gifts and gift cards that you know the person will use. Remember that by adding the amount to the 1099, the individual will be responsible for paying taxes on the amount given, so if you give an expensive, but unvalued and unused gift, you’ve just increased the individual’s tax burden without providing them with any value.

Gifts for employees are treated differently. Please review De Minimis Fringe Benefits on the IRS website for more information.