Tax Tip of the Week
For the week of November 29, 2004

Know the rules for business gifts

The holiday season is a time when businesses like to give gifts to their customers and suppliers. This is a good way to reinforce valuable business relationships and establish goodwill. How much you spend on a gift is a matter of business judgment. But regardless of what you spend, the IRS has its own rules on how much of the value you can deduct.

The general rule is that you can’t deduct more than $25 for a business gift to any one recipient in any tax year. So if you give a valued customer a $50 food basket at Thanksgiving, you can deduct only $25 as a business expense. If during the course of the year you give that person several gifts totaling $80, your deduction is still only $25.

There’s an exception for items such as pens or desk accessories that you distribute widely as promotional items. If the value is under $4 and they’re imprinted with your name, they don’t count towards the $25 limit.

What about holiday gifts to your own employees? If you make gifts of food or other items of nominal value, you can deduct the cost as a nonwage business expense. But if the gifts are of higher value, or you give them only to senior executives, you may have to treat them as noncash bonus payments. In that case, you would deduct the value as wage expense and the employees would be liable for income and payroll taxes.

If you’re planning a holiday gift program and have questions about the tax treatment, please contact our office.

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