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Did you give gifts? Know the IRS regulations and Tax Implications

A critical mistake some business owners make is not being familiar with the IRS limits on gifting.

There are two types of gifts:

  • Personal gifts, which, for tax purposes, can either fall under the lifetime limit or the annual limit
  • Business gifts that can be tax deductible, depending on how much is spent on those gifts

Personal Gifts

For personal gifts, any individual is allowed to give another individual up to $14,000 per year as a gift. That money is not a deduction to you, but it is not income to the person you’re giving the gift to. Essentially it is tax neutral – it doesn’t increase or decrease tax liability for either party. Additionally, it does not count towards your lifetime limit for gifting. What many parents will do is give $12,000 or $13,000 to the children as a gift every year and put that money into a college fund or into some sort of savings fund, for future retirement or life expenses, etc.

This type of gift is not a deduction to the parents. It is not income to the children either. Though the limit is $14,000 but you should not give more than $12,000 or $13,000 because during the year you will be getting your children birthday presents, Christmas presents, etc. The total gifting amount to any one person from another person cannot go over $14,000 per year if you want to avoid tax implications.

Business Gifts

Regarding business gifting, the limit that can be counted as a business expense is $25 per person. Here’s where business owners can run into issues there because typically as a business, you might want to give away some $5 Starbucks cards or $25 meal restaurant certificates for holidays or rewards. Just know that you can only count those gifts as business expenses for tax purposes up to $25 per person. But, there is a way to use this limitation to give larger gifts, you simply have to give a gift that has many parts to multiple parties.

A perfect case to illustrate this is a real estate agent. If a realtor closes someone’s home, the commission on that sale is a good chunk of income all at once, so maximizing expenses at that time can help with the tax liabilities associated with that income. Often the agent will show appreciation by giving some sort of gift to the buyer or seller (whomever they represented in the deal). One of the ways to use the $25 per person limit is give a gift basket. A single gift cannot be worth more than $25 per person and have it deductible, but a gift basket has many gifts in it and can be given to a family that has more than 1 person.

For example, if you were to give a single person a $75 gift card on a single event, you can only deduct $25 of that $75 gift card. However, if you are giving a $75 gift basket, where there are multiple items in the gift basket and that basket can be spread out, say to a husband and wife with a child. That’s three people and so that means $25 per person. Therefore, the gift aligns with the IRS limitations and the entire $75 can be considered a business expense for tax purposes.

If you have any questions on what you’re allowed to deduct as a business or about the rules and gift limitations, either as a business or an individual, you can always reach out to us.

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