How to Deduct Business Gifts

If you give gifts as a part of your business, you may be able to deduct part or all of the cost. The IRS, however, has very specific rules for what constitutes a gift and what does not.

Difficulty: Moderate

Instructions

Things You'll Need:

• Schedule C form

1. Keep receipts for all gifts you give for business purposes. These receipts will help you to prove your deductions if you are ever audited.

2. Track your business gifts throughout the year so you don't have to go through all of your receipts individually at tax time. You should record who the gift was given to, what that person's relationship is to your business and how much the gift cost.

3. Deduct up to $25 in business gifts for each person you give to. The $25 rule means that if you give a gift that exceeds $25, you can only deduct $25 total. If you give multiple gifts that add up to under $25, you can deduct the total cost.

4. Determine whether your gift meets the entertainment exception. Tickets to concerts or sporting events, for example, can be considered either a gift or an entertainment expense. Entertainment expenses are not restricted by the $25 rule, but only 50 percent of the total cost is deductible.

5. Separate gifts to employees from incentives. If you regularly offer employees incentives in the form of merchandise, you may be able to make a claim that these gifts are ordinary and necessary to your business. In these cases, such gifts are fully deductible, but you'll need to back up your claim with documentation if audited.

6. Use Part V "Other Expenses" of the Schedule C tax form from the IRS to list your gift deductions (see Resources below).

Tips & Warnings

• There are some exceptions to the $25 rule. Promotional materials like signs that recipients display at their places of business are not considered gifts. Likewise, small gifts under $4 that are routinely given to clients such as pens or other items with your company name or logo printed on them do not count as gifts.
• When choosing between and entertainment expense and a gift, do the math. If the cost of the tickets is less than $50, classify it as a gift.
• You and your spouse are considered a partnership in the eyes of the IRS, so you cannot collectively exceed the $25 limit to any one taxpayer. Similarly, married couples are considered one taxpayer for gift receipt purposes.
• If you accompany the recipient of entertainment tickets to the event, you must treat that expense as an entertainment expense. It is not qualified for a gift deduction.

Resources

• Schedule C tax form from the IRS