Giving business gifts to clients
QAs a real estate sales agent who files as a sole proprietor on Schedule C, I often give gifts to my clients and referral sources. Are there any limitations as to the deductibility or special rules relating to these business gifts?
AIf you give business gifts in the course of your trade or business, you can deduct the cost subject to certain limits and rules.
You can deduct no more than $25 for business gifts you give directly or indirectly to any one 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 (for example, a company’s sales staff) will be considered an indirect gift to that particular person or to the individuals within that class of people who receive the gift.
A gift to the spouse of a business customer or client is generally an indirect gift to the customer or client. This rule does not apply if you have an independent bona fide business connection with the spouse and the gift is not intended for the other spouse’s eventual use or benefit. These rules also apply to gifts you give to any other family member.
If you and your spouse both give gifts, both of you are treated as one taxpayer. It does not 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.
Incidental costs, such as engraving on jewelry, or packaging, insuring and mailing are generally not included in determining the cost of a gift for purposes of the $25 limit.
The following items are not included in the $25 limit for business gifts:
1. An item that costs $4 or less and:
a) Has your name clearly and permanently imprinted on the gift, and
b) Is one of a number of identical items you widely distribute.
Examples include pens, desk sets, and plastic bags and cases.
2. Signs, display racks, or other promotional material to be used on the business premises of the recipient.
Gift or entertainment? Any item that might be considered either a gift or an entertainment expense generally will be considered an entertainment expense, and not deductible. However, if you give a client packaged food or beverages ( bottle of wine, champagne, etc.) that you intend the client to use at a later date, treat it as a gift expense.
If you give a business client tickets to a theater performance or sporting event and you do not go with the client to the performance or event, you have a choice. You can choose to treat the tickets as either a gift or entertainment expense, whichever is to your advantage. Remember, meals are only 50% deductible and entertainment expenses are no longer deductible!
If you go with the client to the event, you must treat the cost of the tickets as an entertainment expense. You cannot choose, in this case, to treat the tickets as a gift expense.