Business gifts are subject to very limiting rules regarding their deductibility. You cannot deduct more than $25 in gifts to any household in a year. This does not depend on if the gift was related to the business. Taxpayers may deduct some or all of the cost of gifts given in the course of their trade or business. In general, the deduction is limited to $25 for gifts given directly or indirectly to any one person during the tax year. More discussion of the rules and limitations can be found in Publication 463. Incidental costs, such as engraving on jewelry, packaging, insuring and mailing are not included in determining the cost of a gift for purposes of the $25 limit.
Business Gift Limitations
The gift limitation applies whether the gift is given directly or indirectly. For example, if you give one gift to a client and another to his wife (or child, etc.), it is treated as if you gave the gift indirectly to the client (unless you have a clearly separate and independent business relationship with that family member). Likewise, if you give a gift to a business with the intent that a certain individual receive the benefit of that gift, it is counted as an indirect gift to that individual.
The $25 limit applies only to gifts to individuals. It doesn’t apply if you give a gift to an entire company, unless the gift is intended for a particular person or group of people within the company such as the president or manager). Such company-wide gifts are deductible in any amount, as long as they are reasonable.
Promotional Items as Gifts
Inexpensive items that are clearly promotional in nature are not considered gifts (such as a pen with your company logo on it). To qualify as a promotional item, its value must be less than $4 per item. The item must have your business name clearly printed on it, and it must be something that you distribute widely to many people.
Gifts that Do Not Come Under the $25 Limitation
- Tax free scholarships
- Tax free prizes and awards, and
- Achievement awards to employees in recognition of length of service or safety achievement.