How to Calculate Business Gifts in Tax Deductions

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Giving a business gift is a good way to show appreciation to a client, customer, vendor or employee. It can also be a deductible expense on your tax return if you follow the IRS rules and stay within the allowable limits. In some case, however, treating the expense as a gift may not be the best way to go. Here's how determine how to calculate business gifts

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Instructions

Difficulty: Moderate

Step1

Know the IRS characterization of a business gift. Generally, this means appreciation for past service or to strengthen a business relationship. If it can be considered either entertainment or a gift, the IRS classifies it as entertainment. You can give gifts to as many business associates as you wish, but there are limitations and exceptions.

Step2

Recognize that the IRS places a limit of $25 on the deductability of all gifts to one recipient. This limit applies to all gifts in any tax year to the same recipient. For example, if you give a gift worth $15 to a recipient and then later give a $10 gift to the same person, the total is $25 and both gifts are fully deductible. However, if you do business with a husband and wife, they are counted as one recipient and the $25 limit applies the total you give to both of them.

Step3

Understand that the $25 limitation also applies if you and your spouse are in business together and you are the givers. The IRS treats the two of you as a single giver as well. This means that you and your spouse cannot each give a $25 gift to the same recipient and claim a deduction for both gifts.

Step4

Consider that some expenses must be treated as entertainment rather than a gift. For example, if you take the recipeint(s) to dinner, a concert, a sporting event or the theater, the IRS requires you to treat this as business entertainment. Entertainment is deductible at 50% of the cost. This is often a better deduction than treating the event as a gift with the $25 limitation.

Step5

Give a customer or other business associate tickets without accompanying him to the performance or event gives you the option of treating it as a gift or entertainment. Determine whether classifying it as a gift or a business entertainment expense gives you a better deduction, and use the one that gives you the better tax benefit.