Client gifts are more than a thoughtful gesture—they’re a way to build lasting relationships and show appreciation. And if you play your cards right, they can also help trim your tax bill. But before you start wrapping gifts, there are some IRS rules to know about what’s deductible. Here’s a straightforward guide to making the most of client gifts without leaving money on the table.
The $25 Limit on Business Gifts
The IRS allows you to deduct gifts given to clients as long as they are business-related. However, there’s a catch: you can deduct only up to $25 per client per year. This means that if you give a client a gift that costs $50, only half of that amount—$25—can be deducted from your taxes.
This limit applies to giving a single or multiple small gifts throughout the year. Also, if you and your spouse work in the same business and give gifts to the same person, the $25 limit still applies. The IRS considers both spouses as a single “taxpayer” for this rule.
What Costs Are The Excluded Costs?
If you thought this $25 limit was pretty strict, there’s a bit of good news: the limit doesn’t include certain “incidental” costs. These are expenses like engraving, packaging, and shipping, as long as they don’t add substantial value to the gift itself. So, if you want to send a beautifully engraved pen set or have a gift shipped in special packaging, these extra costs can be deducted in addition to the base $25.
Exceptions to the $25 Limit
There are a few exceptions that make this rule a bit more flexible. For instance:
- Items Under $4 with Branding: Gifts that cost $4 or less, bear your company’s name, and are given out regularly don’t count toward the $25 limit. Think of small branded items like pens, calendars, or keychains that you might distribute as promotional material. As long as they’re inexpensive and include your business name, they won’t impact your $25 deduction limit.
- Entertainment Considerations: If a gift could also be considered entertainment (like tickets to a show or sporting event), it will generally fall under entertainment expenses, which are not tax-deductible. So, if you’re giving out something that could be either a gift or entertainment, remember that it won’t qualify for a deduction.
Keeping Track of Your Gifts
To qualify for these deductions, you need to have proper records. The IRS requires you to document:
- The business purpose of the gift
- Details of the gift: amount spent, date, and who the recipient is
Keeping timely records makes the tax filing process smoother and ensures that you’re following IRS guidelines.
A Quick Recap
In a nutshell:
- $25 Limit: You can deduct up to $25 per client per year on business gifts.
- Incidental Costs: Expenses like engraving and shipping don’t count toward the $25 limit.
- Under $4 Items with Branding: Small promotional items don’t count toward the limit if they have your business name and cost $4 or less.
- Entertainment Rules: If a gift could be considered entertainment, it’s not deductible.
Wrapping It Up
Client gifts, done right, offer the perfect mix of goodwill and tax savings. At Tax Goddess, we’ve already saved our clients over $1.68 BILLION—and now it’s your turn! Whether it’s deductions for gifts or uncovering other strategies, we’re here to help. Curious how much you could save? Book a FREE consultation with us today to unlock your tax savings potential!
