Tax Deductible Gifts for Businesses
Being aware of the latest tax laws can help achieve the maximum tax benefits and rebates. Prudent tax management is important for any business to control its costs and stay competitive. In the United States, the Internal Revenue Service (IRS) has a provision to allow business tax deductions for gifts. Irrespective of the nature of your business or trade, if you give gifts during the course of your business, you are eligible for full or partial tax deduction against the cost of the gifts.
Upper Limit of $25 Per Business Gift
The tax deduction limit in case of business gifts is capped at an upper limit of $25 for each person to whom you give a business gift during a particular tax year. The gift may be given directly or indirectly but if it is for business purposes, it becomes eligible for deduction. If you give a gift to another company with the intent of its eventual use by a particular individual or a group of people within the company, it will be treated as an indirect gift to those beneficiaries.
The limit of $25 per recipient means that you can give more than one gift also as long as the total value is limited to $25. It effectively means that if you give two gifts worth $20 and $30 during the course of the tax year to one individual, you get a tax deduction of $25. In certain situations, you may give a gift not to the business associate directly, but to his family members such as a spouse or kids. In this case, the gift will be treated as an indirect business gift as long as you do not have a direct business relationship with the recipient.
If during the course of business, you and your spouse both give gifts, you both will be considered as a single taxpayer for the purpose of business tax deductions for gifts. This is irrespective of the fact whether you both are independent businesses, or whether both of you have direct and independent relationships with the recipient. Similarly, when a partnership gives a gift during the course of business, the partners and the partnership firm are treated as a single taxpayer.
Example: Mr. X has a business relationship with Z Company. Mr. X and his wife Y send three boxes of wine to Z Company as a token of thanks for their business. The cost of each box of wine is $50. Within the Z Company, three managers take one wine box each for their home use. X and Y have no direct or independent business connection with any of the three managers’ families. Therefore, X and Y can now avail a deduction of $25 x 3 = $75 for the three gifts they sent to the same company.
Incidental Costs and Exceptions
If the gift is sent in any standard form of packaging, or there is any value addition done to personalize the gift, such incidental costs, these are usually excluded when computing the cost of the gift for the purpose of a tax deduction. Similarly, the costs of transportation and insurance are not included. It should be noted that an incidental cost means a cost that does not add a major value to the gift. For example, standard gift wrapping is an incidental expense, but if the gift is packed in a silver tray purchased at a considerable value, the cost can be included for tax deduction.
Any gift costing less than $4 is not considered a business gift for the purpose of tax deduction. Secondly, if the sender imprints his or her name or the company’s name, it will not be counted as a gift for deduction purposes. Bulk gift items for wide distribution such as identical key chains, pen sets, or any such products are not considered as business gifts. Any point of purchase (POP) display materials for promotional purposes to be placed at the recipient’s business site are not treated as a business gift. Any such items that may either be treated as gift or entertainment are usually considered under entertainment expense.
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Resource: IRS - https://www.irs.gov