Are Client Gifts Tax Deductible?

The holiday season is a joyful time, and businesses often like to spread the good cheer with holiday gifts for their clients.  Recipients appreciate both the thought and the gift, which creates goodwill and benefits everyone. But did you know that Santa, better known as the IRS, has an extra bonus for you as the giver?

This article will tell you all you need to know about whether client gifts are tax deductible and the tax implications of gifting for your company.

What Is a Client Gift?

If you give a gift in the course of your trade or business, then the IRS considers it a business or client gift. You may give the gift directly to your customer or indirectly to them and their family. 

Are Client Gifts Tax Deductible?

Tangible gifts, such as gift baskets with food and beverages inside, are typically tax deductible, and businesses can deduct up to $25 per client per year. A cash gift or gift card of any amount is not tax deductible. 

According to San Francisco accountant Steve Axelrod of Tax Office SF, the $25 limit has been on the books for business gifts for a long time. This amount has not been increased to keep up with inflation. Nonetheless, this deduction can quickly add up depending on how many gifts your business sends. This deduction applies in many circumstances, but it is important to look more in-depth at what is and is not allowed by the IRS.

Here are some key points to consider regarding the tax benefits of gifting to clients.

The $25 Deduction Limit

The IRS limits the gift deduction to $25 per client per year. This applies even if you give multiple gifts to the same client throughout the year. For example, if you send a fruit box worth $40, only $25 of that amount would be deductible. Any additional gifts to the same client that year would not be deductible. Check your state tax laws to see whether gifts are deductible for state income tax purposes. In California, the state tax deduction is the same as the federal deduction of $25.

Incidental Costs  

Incidental costs such as packaging, shipping, and engraving are not included in the $25 limit and can be fully deductible. So, if your gift includes shipping and handling fees, you can deduct those additional costs separately.

Promotional Items 

If the gifts are branded promotional items with your business name, such as pens or calendars, that cost less than $4 each and are distributed widely, they can be fully deductible. These are considered advertising rather than personal gifts and would not count towards the annual $25 deduction limit per client.

Gifts to Employees

It’s important to differentiate between gifts to clients and employees. Employee gifts have different tax rules and limits. For more information please check out The FruitGuys’ blog on employee gifting.

Expensive Gifts

You can send a client a gift worth more than $25, but the IRS recommends against gifts that are “lavish or extravagant.” According to Axelrod, “lavish is based upon facts and circumstances so it is not codified.” It is best to check with an accountant if you want to gift a client an item valued at over $100. 

Reciprocal Gifting

For an item to count as a gift in the eyes of the IRS, there must be no obligation placed on the client to return a corresponding gift in any way or form.  If a client is concerned about whether the gift is appropriate and chooses not to accept the gift, your company should take it back graciously.

Entertainment Gifts

IRS rules state that “any item that might be considered either a gift or entertainment will generally be considered entertainment. However, if you give a customer packaged food or beverages that you intend the customer to use at a later date, treat it as a gift.” That means tickets to a concert or sporting event are considered types of entertainment and can’t be deducted from your business’s taxes, but edible gifts like The FruitGuys’ gift boxes are tax deductible.

Accounting

Companies should track gift expenses carefully to maximize their deductions. The IRS rules specify that “you need to have records that prove the business purpose of the gift as well as the details of the amount spent.” These details include the cost of the gift, the date of the gift, and a description of the gift. Giving the same gift to multiple clients at the same time makes record-keeping simple. It’s always a good idea to consult your tax professional for more detailed advice specific to your situation.

If you play your cards right, you can make your clients smile with a suitable holiday gift and save on your taxes at the same time. The FruitGuys’ gifts are a great fit for tax-savvy gifting: They start at just $27 and shipping and handling should be tax deductible. Once you’ve checked your list twice, click here to start shopping. 

*This article contains general information and should not be construed as professional tax, legal, or accounting advice. Consult your own accountant or tax advisor to determine the best approach for your situation.