Gifts for Clients and Tax Deductions: What you Need to Know

Tax deductions for client giftsYou foster strong relationships with your customers through exceptional service and value. But a thank-you gift never hurts. In addition to the goodwill you earn as a gift-giver, you also earn a small tax deduction from the IRS.

A very small tax deduction, which is limited to a maximum of $25 for each client. The amount may seem miserly but it was generous when it was set more than 50 years ago. Here are a few things you should know about the tax benefits of your gifts:

  • One customer, one deduction. The IRS allows only one deduction to a customer. So if you give gifts to a customer, the customer’s spouse and each of their children, it’s still capped at $25. Also, you and your spouse are treated as one taxpayer for that client, even if you have independent business relationships with the client and work for different companies.
  • The IRS doesn’t consider incidental costs to be part of the gift, and so those costs are not capped. The service says incidental costs include packaging, gift-wrapping, shipping and personalized engraving on pens or jewelry.
  • Small-value giveaway items are not considered gifts for the purpose of the $25 limit. Anything that costs less than $4 per unit, has the name of your business on it, and is widely distributed is considered a promotional item. Those can be written off as a business expense.
  • Always document your gifts completely. Your records should include the description of the gift and the receipt to verify its cost, the purchase date, the business purpose and the relationship between the gift giver and the client.

Some items fall into a hazy area between gift and entertainment, such as concert, theater or sporting event tickets. If you give these items to a client, they are subject to the $25 limit. However, if you attend the event with the client, the tickets become an entertainment expense, and 50 percent of the face value is deductible.

For example, if you give a client two $15 theater tickets, it could be a $25 gift expense or a $15 entertainment expense. If the two tickets cost $200, you get the $25 deduction if you don’t attend, and a $100 deduction if you do.

Check out the full IRS chapter on the gift deduction.