As a small business owner, you may give good clients gifts during the course of the year to reward them for their loyalty. But deductions forare limited to a paltry $25 annually per recipient.
Strategy: Know all the “ins” and “outs” of the tax rules. With some careful planning, you may be able to maximize the deductions for your business.
If you give clients certain items that may be treated as entertainment instead of business gifts, you’ll usually come out ahead tax-wise on the deal.
Here’s the whole story: The $25 limit on deductible business gifts applies to the value of all gifts given to a recipient for the entire year. For instance, if you give the same client five $20 gift cards in 2011, you can deduct only $25 of the total $100 in gifts this year. This $25-per-year limit hasn’t been raised in decades. And you can’t circumvent the rules by having your spouse give an additional gift or having a client’s spouse receive an additional gift.
But you do have some room to maneuver on items that also may be treated as entertainment expenses. Although the deduction for entertainment and meal expenses is limited to 50% of the cost, you don’t have to deal with an overall dollar limit.
Example: You give your two top clients four courtside tickets to the biggest basketball game of the season. The tickets cost $200 apiece for a total of $800. If the tickets are treated as entertainment, you can deduct $400 (50% of $800). If the tickets are treated as business gifts, your deduction is limited to $50 ($25 x 2).
Generally, items that may be considered either gifts or entertainment, like tickets to sporting events and concerts, have to be treated as entertainment expenses. If you give tickets to a client and don’t attend the event yourself, you have the choice of deducting the cost as a business gift or entertainment. If you tag along, the cost must be treated as entertainment; there’s no choice.
Tip: Incidental costs such as packaging, insurance and mailing don’t count toward the $25 business gift limit.