Business gifts are usually given to promote goodwill, to strengthen business relationships, or as a token of gratitude. If you are a small business owner, self-employed, or an independent contractor, you may want to strategize and give gifts to your customers, suppliers, hired consultants, or freelancers. Benefits of business gifts include customers and suppliers feeling valued, word-of-mouth marketing, and repeat orders! Plus, business gifts are a deductible business expense that can lower your taxes. Read on to learn the Internal Revenue Service rules and limitations on business gifts as a business deduction. 

Business Gifts 

In general, business gifts have a $25 deductibility limit for every gift given directly or indirectly to each person every year.  

The identification of the recipient is important since the $25 deduction is allowed only one time per person per year. Following are the IRS rules: 

• A gift is considered an indirect gift to a specific person or group of individuals even if it was gifted to a company where they belong to if the gift is meant to be for personal use or consumption. 
• A gift provided to a customer’s family member is considered an indirect gift to the customer unless you have a legitimate business relationship with the customer’s relative. 

Example. You gifted ABC Company, a loyal customer, with five sets of wine worth $45 per set. The five senior officers of ABC Company took one of each gift set for home use. The maximum amount that you can claim as a business deduction is $125 ($25 x 5).  

The following month you scored a major sale to ABC Company and decided to give one of their senior officers’ spouse a gift worth $75 as a token of the successful sale. The gift is considered an indirect gift to the senior officer therefore none can be deducted for this transaction since the deductibility limit was already maxed out when you gave the set of wines.  

Also, for this deduction, married couples are treated as one taxpayer even if you have separate business, have different employers, or have an independent business relationship with the recipient. Same goes for a partnership and the partners which are also treated as one taxpayer. 

Incidental Costs.  

Incidental cost that does not add substantial value to the gift such packaging, engraving, and mailing is not included in determining the cost of the gift. So, a paper bag bought to pack the gift is considered an incidental cost and cannot form part of the value of the gift. While a decorative wine holder adds substantial value to the wine and shall be included in determining the total value of the gift with which the $25 limit will be applied. 

Exceptions.  

Gifts that cost less than $4 each item shall not be applied with a $25 limit if they are considered business giveaways, but it must have your business name or logo printed on each item and the item must be one of other identical items you intend to give away such as pens, mugs, notepads, etc. Promotional materials such as signs and display racks to be used on the recipient’s business premises is also an exception to the $25 limit. These are classified as marketing expenses. 

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