Gifting this holiday season has more tax incentive than ever before. Rewarding your hard-working employees at the end of the year with gifts opens up the door to better work relations, a healthier atmosphere and professional networking. Plus, it’s a nice way to thank them for everything they’ve accomplished over the last 12 months. You don’t have to stop at your employees either, its common to gift your customers and business associates as well!
However, we’re not here to pick out gifts for your customers, we’re here to talk to you about another incentive for purchasing gifts this holiday season. Did you know you can receive a nice tax deduction that may equal up to the sum of all your business gifts? That’s like giving gifts for free! Here’s some rules you need to know.
There’s a Limit on the Business Gift Tax Deduction
Gifting doesn’t have to be expensive, but for all those high price tag presents there is a limit as to how much you can deduct when filing your taxes. As of now, that limitation is $25 per recipient and has been since day one. Taxpayers would think this number would change over the years to adjust for inflation, but it hasn’t.
You can spend as much as you want on a client or employee, but you’re only going to be able to deduct $25 maximum. Don’t get confused, this deduction isn’t per gift but per recipient. As an example, if you purchase multiple gifts that sum up to $300, you can only deduct $25 as the gifts went to the same person. However, if those gifts instead went to three separate recipients, you could deduct up to $25 for each person, up to $75 in this situation. No matter how you look at it, that’s still money you get back just for giving some gifts away to your clients and workers.
Direct vs. Indirect Gift Giving
The IRS has two subcategories for you to divide your business gifts when filing your taxes: direct and indirect gifts.
Direct gifts are as they sound, it’s when you give a gift to a recipient directly without any middleman involvement. One example that doesn’t make the cut is treating your entire office staff to a pizza party before breaking off for the holidays. What does is giving an oral hygiene gift set to an employee (not that you would out of necessity we hope). On the other hand, indirect gifting involves gifts given to someone through another person. You may gift a new set of golf clubs to an employee, who knows full well its not meant for them but for their spouse. Keep track of these gifts and make sure you categorize them correctly, so the IRS knows how many gift recipients you have to award your $25 deduction for each.
Incidental Costs Are Not Deductible
When it comes to reporting your taxes, it’s of utter importance that its accurate. After all, the IRS is strict about their rules. That’s why you need to know what incidental costs are and why they aren’t deductible.
Incidental costs are costs that don’t increase the value of a gift, yet regardless you still pay them. This includes any gift-wrap you use, shipping and handling charges, insurances and any engravings. In some cases, these costs can be more expensive than the gift itself, but you’re still unable to count it towards the $25 limit for your business gift tax deduction.
Forget About the Entertainment Deduction
Before, you could write off your gifts under the entertainment category. This included any concert tickets, movie passes and vacations you’ve gifted your associates, customers or employees this past year. By taking the entertainment deduction instead of the business gift deduction, you could write off 50% of the expenses per expense instead of $25 per recipient. If you made lots of applicable entertainment expenses for your business, that was a nice way, this proved to be a very nice deduction on your taxes.
Not anymore. Starting with the Tax Cuts and Jobs Act of 2017, the entertainment deduction is no longer available. The reason behind it is there are more deductible opportunities now available for business owners under the same act that may save even more money.
Take advantage of the business gift tax deduction and treat your employees to a few gifts this holiday season. When it comes to tax time, the team at Lucia CPA will be here to help you organize and maximize your tax return. After all, we’re not your ordinary bean counters. If you have questions or would like to learn more about the business gift tax deduction, feel free to contact us at anytime online or by phone at (800) 614-0139.
