Holiday baskets for clients, thank-you gifts to referral partners and presents for staff are common business expenses. The tax rules are less generous than most owners expect. The IRS explains them in Publication 463.

The $25 limit

You can generally deduct no more than $25 for business gifts you give directly or indirectly to each person during the tax year. A $100 gift basket to a client yields a $25 deduction. The limit has not changed in decades, so it is worth knowing before you plan an expensive gifting program.

What does not count toward the limit

  • Incidental costs such as engraving, packaging, insurance and mailing are generally not included in the $25
  • Items costing $4 or less with your business name permanently imprinted, distributed widely, such as pens
  • Signs, display racks or promotional material used on the recipient's business premises

Gifts to a company

A gift to a company intended for the eventual personal use of a particular person is treated as a gift to that person. A gift to a company for general business use is not subject to the per-person limit in the same way. A tray of cookies for a client's whole office is commonly treated differently from a bottle of wine for one manager; your preparer will apply the rule to the facts.

Gifts or entertainment?

Tickets to a show or game given to a client can be treated as a gift or as entertainment, depending on whether you attend. Entertainment is generally not deductible, so this matters.

Gifts to employees

Gifts to employees follow different rules. Cash and cash equivalents, such as gift cards, are taxable wages regardless of amount. Small, occasional non-cash items such as a holiday ham may be excludable de minimis fringe benefits, as Publication 15-B explains. Employee achievement awards have their own rules. Run gift cards for staff through payroll.

Records to keep

For each gift, record:

  1. The cost and date
  2. A description of the gift
  3. The business reason
  4. The recipient's name and business relationship

In your books

Create a separate business gifts account and keep the recipient list with it. At year end, the deductible portion is calculated per recipient. Mixing gifts into marketing or meals accounts makes the limit impossible to apply correctly. See our chart of accounts guide and what business records to keep.

Recording gifts so the limit is easy to apply

The per-recipient limit is much easier to apply if gifts are tracked as they happen rather than reconstructed at year end. A simple approach:

  1. Create a separate "Business gifts" expense account so gifts are not mixed with marketing or entertainment
  2. In the memo of each transaction, record the recipient's name and company
  3. Keep incidental costs, such as engraving, packaging and shipping, in the description, since these may not count toward the limit
  4. At year end, run a report grouped by recipient and identify any amounts above the limit

Items that are clearly promotional, such as inexpensive branded items handed out widely, are often treated differently from gifts; Publication 463 explains the distinctions. Record promotional items in an advertising account.

Gift cards and other cash equivalents given to employees are generally taxable wages rather than gifts, so route those through payroll.

Key terms

Definitions for terms used in this guide, from our small business glossary:

  • Fringe Benefits: Fringe benefits are forms of pay other than wages, such as health coverage, vehicles or discounts, which are taxable unless an exclusion applies.
  • Chart of Accounts: A chart of accounts is the organized list of every account a business uses to record transactions in its general ledger.