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Squeeze bigger deductions from business gifts

by on
in Small Business Tax,Small Business Tax Deduction Strategies

As a small business owner, you may show your appreciation to clients by giving them gifts. Unfortunately, the deduction for business gifts is limited to a paltry $25 per recipient per year.

Strategy: Learn the “ins” and “outs” of the tax rules. By planning ahead, you can get the most tax-saving bang for your bucks.

In particular, you might benefit from a special rule allowing you to deduct certain gifts as business entertainment.  

Here’s the whole story: The $25 limit applies to the value of all gifts given to a recipient during the year. For instance, if you give a client five $20 gift cards, you can only deduct $25 of the total $100 in gifts.

This limit hasn’t been raised in decades. And you can’t circumvent the rules by giving a gift to a client’s spouse or by having your spouse make an additional gift.

However, there is some room to maneuver on items that may be treated as entertainment. Al­­though the tax law limits business entertainment deductions to 50% of the cost, the $25 limitation rule doesn’t apply to entertainment costs.

Example: You give each of your two best clients four courtside tickets to the biggest basketball game of the year. The tickets cost $250 each for a total of $2,000 ($250 × 8). If you treat the tickets as entertainment, you can deduct $1,000 (50% of $2,000). In contrast, if the tickets are treated as business gifts, your deduction is a miniscule $50 ($25 × 2).

Generally, items that may be deducted as either business gifts or entertainment, such as tickets to sporting events and concerts, must be treated as entertainment if you tag along. Conversely, if you give the tickets to a client and don’t attend the event yourself, you have a choice: Deduct the cost as a business gift or entertainment. Usually, you’ll come out ahead with an entertainment deduction.

Tip: Incidental costs—like packaging, insurance and mailing—don’t count toward the $25 business gift limit.

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