Many entrepreneurs and small businesses are not aware of the tax implications of gifts given to employees, customers and business associates or awards given to employees. There are some specific limits and rules around gifts and awards that you should understand. First, you can deduct gifts to customers, clients and business associates, but you are limited to $25 per recipient per year. That’s really a low amount. This limit was set in 1954, when gas was 25 cents a gallon, and has never changed. Try sending flowers or a fruit basket for less than $40! (It may be time for a new tax act to change this rule.) You are allowed to deduct the cost of engraving, packaging and mailing the gift separately, provided the added cost is incidental to the gift itself. When you give a customer tickets to a football game, a concert, a play, etc., the IRS says you can treat it either as a gift or as entertainment expense, which is 50% deductible. In most cases, with the high cost of sporting and arts events, it will usually make more sense to call these expenses “entertainment” rather than gifts.
Can you combine limits?
With this low limit on business gifts, you might try to get around it by combining limits of your client, their spouse, their children, etc. However, the IRS considers married couples to have one $25 limit between the two of them. You can have a separate limit for the client’s child if you have a real business relationship just with that child. This assertion might not fly if you’re giving a small child a nice bottle of French Bordeaux. The gift must be appropriate for the recipient. The IRS does not let you combine your limit with your spouse’s limit for the same individual, even if you both have real business relationships, separate from one another, with the same person. They just don’t want you to go over that $25 limit!
Gifts to employees or co-workers
Now, let’s talk about gifts to your employees or co-workers. Low-value gifts to employees are fully deductible. What’s a low value gift exactly? This is not defined in the tax code, so it’s really up to you and your tax/legal team to decide. The most popular gift to employees is cash or gift cards. They are perfect for any occasion! But as employee gifts, cash, gift cards and other cash equivalents are considered taxable compensation to be included on the employee’s W-2. So maybe gift cards are not the perfect gift after all. Achievement awards to employees are not treated as gifts or taxable income. If the achievement award is $400 or less, is presented to employees at a “meaningful presentation”, and is not cash, gift cards, securities, or other cash equivalents, it is deductible in full and not taxable to the employee. If your business has a documented qualified employee achievement award program that does not discriminate in favor of highly compensated employees, you can give out fully deductible achievement awards of up to $1,600 per year per person, but the gifts cannot be cash or cash equivalents.
Say no to gifts to officials
What about gifts to police officers, regulatory inspectors, and government officials? (Whoa, just typing that made me feel all queasy inside.) You need to steer clear of these types of gifts, which may be considered bribes. Obviously, bribery is illegal in the U.S., as it is in most countries around the world. However, bribes are commonly used in some places to help “grease the wheels”, to secure approvals, and to win contracts. As a U.S. company doing business in another country, you are prohibited from bribing by the Foreign Corrupt Practices Act (FCPA), which carries stiff monetary penalties and/or jail time for those found guilty. Anything that could be construed as a bribe, including trips, accommodations, etc., as well as cash, is subject to the FCPA as circumstances dictate. So if you paid for the Defense Minister of Country X’s spouse to go to fashion week in New York City, complete with prime tickets to her favorite designers’ shows, and within a few weeks your company sold Country X’s military a large order of insect repellent, you may get a visit from the U.S. Department of Justice. Consult with an attorney if you’re still thinking about using this tactic. I’ll say it, even though it should go without saying, that bribes, and the associated fines from the U.S. government, are not deductible.
In summary, deductions for gifts to customers, clients, and business associates are limited to $25 per person per year. Gifts to employees do not have a limit but they must be “reasonable”. If cash or cash equivalents are given, they must be reported as compensation and taxed, in order to be deductible. Certain employee award programs have higher limits for gifts, but require other compliance measures. As is usually the case, documentation is your friend when it comes to deducting gift expenses.
If you want to read more on this topic, search for Pub. 15-B at irs.gov under IRS Forms and Publications.