Are Client Gifts Tax Deductible?

Are Client Gifts Tax Deductible?

​How to write off more this year than you thought you could

Most businesses today realize that appreciating people through gifting can be a powerful tool at their disposal to create or deepen a connection with a client or a prospect.

For many just starting down the path to gifting they have questions like: 

  • "Are business gifts tax deductible?" 
  • "How much can you write off on a client gift?" 
  • "What gifts are fully deductible?" 
  •  "What makes a good client gift?"

Other businesses like Realtors and mortgage lenders are EXPECTED to give a client gift (also known as a closing gift) and thus have been giving them out by the hundreds. Unfortunately they often gift with no real knowledge of how much they are allowed to deduct per gift, or how their CPA is categorizing the gift or if they're doing it correctly.

So to start off...

Can You Deduct a Gift for a Client, Prospect, or Employee

Let's start simple (or as simple as you can get with the IRS) 

According to IRS.Gov:

If you give business gifts in the course of your trade or business, you can deduct all or part of the costs subject to the following limitations:

  • You deduct no more than $25 of the cost of business gifts you give directly or indirectly to each person during your tax year.

  • If you and your spouse both give gifts to the same person, both of you are treated as one taxpayer.
  • Incidental costs such as engraving, packing or shipping aren't included in the $25 limit if they don't add substantial value to the gift.​

  • ​Any item that could be considered either a gift or as entertainment is generally considered entertainment and cannot be deducted.
  • You need to have records that prove the business purpose of the gift as well as the details of the amount spent.

What does this mean for gifts for Clients and Prospects?

Most businesses today realize that appreciating people through client gifts can be a powerful tool at their disposal to create or deepen a connection with a client or a prospect.

For many just starting down the path to gifting they have questions like: 

TANGIBLE PROPERTY - You can deduct no more than $25 per person, per year for business gifts. The IRS specifically states that incidental expenses, such as postage, engraving and gift wrapping are not included in that $25 limit. However, if something adds value to the gift itself, it cannot be considered as incidental.

For example, say you purchase a gift basket for a client that costs $25, add a $25 bottle of wine to the basket, and spend another $20 wrapping and shipping basket. Your deduction would be $45 – a maximum of $25 for the gift basket and the wine and an additional $20 for wrapping and shipping. 

ENTERTAINMENT - Be careful with deducting gifts that might be considered entertainment expenses. For example, if you give tickets to a ball game to a client, is that a gift or entertainment? 

 Generally, if you go to the event with the client, the tickets should be treated as an entertainment expense. If you give tickets to a client and they go without you, it's most likely considered a gift.

So there you have it, you can only spend $25 on a client gift... 

 ...Wait what? that's totally ridiculous!

Could you imagine a real estate agent selling a $500,000 house turning around and saying "Hey Mr. and Mrs. Jones, thanks for the $15,000 commission, here's $25 to Chili's!"

This number seems arbitrarily low considering this amount wouldn't even cover two movie tickets in 2020. The problem is that the limit was set in 1962 and hasn't been changed since!

To put that into perspective, $25 in 1962 would be worth $218 in today's dollars based on inflation. Which would fit for most businesses, but until this law is changed, business owners and salespeople around the nation are stuck with a few bad choices.

  1. Spend $25 or less per client, and be thought a cheapskate  
  2. Spend more than $25 per gift, while only being able to deduct the first $25 
  3. Spend more, deduct it all, and pray you don't get caught.

I definitely don't suggest option 3. I've personally met with a half dozen people who had been deducting the full cost of their gift (without knowing they weren't supposed to) and upon being audited, they were forced to pay extra for every gift they had given a client over the past 3-5 years! 

Luckily there are a few minor exceptions...and one big one

Gifts to a business

The $25 limit applies only to gifts directly or indirectly given to an individual. Gifts given to a company for use in the business aren’t subject to that $25 limit.  

Gifts to a married couple 

If you have a business connection with both spouses and the gift is for both of them, the $25 limit doubles to $50. I have been told before that to be safe it should technically be two $25 gifts.

Incidental costs of making a gift 

Incidental costs aren’t subject to the $25 limit. For example, the costs of custom engraving, packing, insuring and postage on a gift are deductible in addition to the $25 limit for the gift itself.

It's important that you know you need to document all of this spending. Be sure to track the qualifying expenses separately (typically by charging them to a separate account in your accounting records so that a full deduction can be claimed.) In addition, its best practice to keep track of a description of the gift, the gift’s cost, the date the gift was purchased, the business purpose of the gift, and the business relationship to the taxpayer of the person receiving the gift. 

You may be thinking, "Okay, well that gets me to $50 for a couple plus the cost of incidentals, but that doesn't make a huge impact." Well friends, here's where the real opportunity is... 

How to Deduct 100% of Your Gifts

(regardless of how much you spend)

The main problem is that until the IRS changes the business gifts deduction from $25 to something more reasonable for this decade, people will be stuck wasting money on "gifts."

​So what other ways can you appreciate you clients that are 100% deductible? 

The answer becomes, don't give them a "gift," give them branding. By giving the client something that is permanently branded with your information, your gift is no longer a gift. It's promotion or advertising, which is 100% deductible regardless of the price tag.

So then the question becomes, "How do you get a client something branded that they will actually appreciate?" 

For an article on the 5 Keys to giving impactful client gifts 

Branding a gift, doesn't mean it can't be

 Personal, Valuable, or Meaningful.

Car Dealer Gift - branded and personalized

Find something your clients will love forever and use day in and day out. Then have it tastefully branded with your information.

Also, consider going the extra mile to brand it with the client's information as well. Now, not only are you honoring yourself and your bank account but you're able to really make an impact on you clients because as Dale Carnegie says, “A person's name is to him or her the sweetest and most important sound in any language.”

Here's a letter from my CPA explaining how this is fully deductible. He is specifically talking about using Branded Cutco as a gift, but the same goes for any permanently branded item you give to a client. 

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Gifts for Employees

Giving a gift to an employee is in some ways more complicated than gifting to a client. This is because you not only have to ask the question, "Can I deduct this gift?" but also "will my employee have to pay taxes on this gift?"

The important facts in figuring this out are related to the form of the gift and the value.

If the gift is considered taxable income to the employee, you are required to withhold all applicable federal and state income and payroll taxes. You must also pay other employment taxes, such as federal and state unemployment taxes on these amounts.

TANGIBLE PROPERTY: Gifts of property are not considered taxable income to employees as long as they fall under the definition of a "de minimis fringe benefit."

According to the IRS, a de minimis fringe benefit is a gift “for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable and impractical.”

This might include:

  • Occasional snacks, coffee and doughnuts 
  • Occasional tickets to a concert or sporting event  
  • Holiday or birthday gifts with a low fair market value, such as flowers, fruit, books, etc.

The IRS does not specify a maximum dollar amount for excluding de minimis fringe benefits from an employee’s taxable income, but the business is still subject to the same $25 maximum deduction as when gifting to a client or prospect.

GIFT CARDS AND CERTIFICATES: Gift cards and gift certificates areconsidered taxable income to employees because they can essentially be used like cash. The cost of the gift card is fully deductible to the business, but you must withhold taxes from the employee’s pay for these gifts.

AWARDS: You can deduct up to $400 of the cost of employee safety and service awards of tangible personal property (such as a watch, or knife engraved with "Sharpest Employee of the Year" 😉) for each employee for each year.

Applicable awards are not taxable income to employees, but they must be limited. For service awards, they cannot be given during the first five years of the employee’s service and no more often than every five years. Safety awards cannot be given to more than 10% of employees during the same year. The Tax Cuts and Jobs Act of 2017 (TCJA) clarified that awards of tangible personal property cannot include cash, cash equivalents or gift cards, vacation, meals, lodging, theater tickets, sports tickets, stocks, bonds or similar investments.

When you record gifts to employees in your books, if the gift must be included in the employee’s taxable compensation, post it to the same account to which you’d post their salary, wages or bonuses. If the gift is not considered compensation, record it under “employee incentives.”

Basically, unless it's considered an award and less than $400, the same principle applies here as it does for clients. Give them something useful and high quality that's BRANDED to the business so that it becomes advertising and thus fully tax deductible. Once again personalizing the messaging to the employee makes it so that the client overlooks the company branding and allows it to become a legacy item to the family.

Rolex as an employee gift

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Editor’s note: This column addresses IRS rules governing the tax deductibility of gifts claimed as business expenses. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Always consult a local tax professional as rules and regulations can vary state to state and year to year. It should also be noted that the Real Estate Settlement Procedures Act (RESPA) prohibits a person from giving or accepting anything of value in exchange for the referral of settlement service business, such as of title insurance, credit reports, appraisals, pest inspections, services rendered by a real estate agent or broker, or the origination of a federally-related mortgage loan. RESPA also prohibits real estate agents from receiving gifts or compensation in exchange for referring business to affiliated businesses.