Tax deductions on gifts to clients subject to ‘draconian limits’

Real Estate Tax Talk

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A common practice among many real estate agents is to provide a housewarming gift when a client closes on a new house.

An agent gives clients a $100 gift card from a home improvement chain or a $100 bottle of wine. He attaches a note with the gift asking for future business and referrals accompanied by three business cards.

Are gifts like these tax-deductible business expenses? Yes, but they are subject to draconian limits.

If you give someone a gift for business purposes, your business expense deduction is limited to $25 per person per year. Any amount over the $25 limit is not deductible. If this amount seems awfully low, that’s because it was established in 1954!

A gift to a member of a client’s family is treated as a gift to the client, unless you have a legitimate nonbusiness connection to the family member. If you and your spouse both give gifts, you are treated as one taxpayer — it doesn’t matter if you work together or have separate businesses.

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 companywide gifts are deductible in any amount, as long as they are reasonable.

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Example: Bob is a commercial real estate broker whose best client is Acme Inc.. Just before Christmas, he drops off a $100 cheese basket at the company’s reception area for all of Acme’s employees. He also delivers an identical basket to Acme’s president.

The first basket left in the reception area is a companywide gift, not subject to the $25 limit. The basket for Acme’s president is a personal gift and therefore is subject to the limit.

There is a special twist if you provide a client with entertainment tickets, such as tickets to a baseball game. If you don’t attend the event with the client, you have the option of treating the tickets as a gift or as an entertainment expense.

Gifts of up to $25 are 100 percent deductible, while entertainment expenses are only 50 percent deductible. So, with tickets that cost less than $50, you get a bigger deduction if you treat them as a gift. If they cost more, treat them as an entertainment expense.

Example: You pay $40 to a scalper for a college basketball game ticket that has a face value of only $30. You give the ticket to a client but don’t attend the game yourself. By treating the ticket as a gift, you may deduct $25 of the expense. If you treated it as an entertainment expense, your deduction would be limited to 50 percent of $30, or $15.

However, if you paid $100 for a ticket with a $60 face value, you would be better off treating it as an entertainment expense. This way you would be able to deduct 50 percent of $60, or $30. If you treated the ticket as a gift, your deduction would be limited to $25.

Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.


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