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Gifts can be deductible business expenses, but IRS limits are strict

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Editor’s note: This column addresses IRS rules governing the tax deductibility of gifts claimed as business expenses. It should also be noted that the Real Estate Settlement Procedures Act (RESPA) prohibits a person from giving or accepting anything of value in exchange for the referral of settlement service business, such as of title insurance, credit reports, appraisals, pest inspections, services rendered by a real estate agent or broker, or the origination of a federally-related mortgage loan. RESPA also prohibits real estate agents from receiving gifts or compensation in exchange for referring business to affiliated businesses.

The holidays are here. This means it’s time for gift giving. Giving gifts to clients and business associates are a great way to generate good will. But can holiday gift giving also general tax deductions? Yes, but subject to severe limits.

$25 gift rule

The basic rule is that 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.

Company-wide gifts

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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.

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 company-wide gift, not subject to the $25 limit. The basket for Acme’s president is a personal gift and therefore is subject to the limit.

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.

Entertainment tickets

There is a special twist if you gift a client with entertainment tickets, such as tickets to a football 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 $400 to a scalper for a pro football game ticket that has a face value of only $100. You give the ticket to a client but don’t attend the game yourself. If you treat the ticket as a gift, you may deduct only $25 of the expense. If you treat it as an entertainment expense, your deduction would be 50 percent of $400, or $200.

Inexpensive gifts

Inexpensive items such as key chains and  pens are not considered gifts for purposes of the $25 limit so long as:

  • they cost $4 or less a piece
  • your company name is clearly and permanently imprinted them, and
  • they are one of a number of identical items you widely distribute.

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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