| It is a common business practice to give gifts to customers and clients as a way of saying thank you for their patronage and to encourage future business. However, the taxpayer giving these gifts must be aware that certain tax laws limit the deductibility of these gifts.
$ 25 Limit
Generally, a taxpayer can only deduct up to $25 for gifts given either directly or indirectly to any one person during the tax year. If the gift was made to the spouse of the business associate, the Internal Revenue Service concludes that it was made to the associate unless the spouse had an independent bona fide business relationship with the taxpayer.
If the taxpayer and his spouse both give gifts to a business associate, only one $25 deduction is permitted because they are considered one taxpayer for the purpose of the gift-giving limitation. This rule applies even if the taxpayer and his spouse are in separate businesses and each has an independent connection with the recipient of the gift.
The cost of theater or sporting event tickets given to a business associate when the event is also attended by the taxpayer is considered an entertainment expense, not a gift. However, if the taxpayer does not accompany the recipient, the taxpayer has the choice of classifying the expense as a gift subject to the $25 limitation or as an entertainment expense subject to those rules and a 50 percent limitation.
Incidental costs connected with a gift that do not add value to the gift, such as packaging, engraving, insurance, and postage are usually not included in the cost of the gift when determining the $25 limit.
Exception to the $25 Limit
Items that cost $4 or less that have the taxpayer's name on them and that are in the nature of specialty advertising items are not considered gifts for the purpose of the $25 limitation. Neither are signs or other promotional materials designed for use on the business premises of the recipient.
Awards to employees
Awards of tangible personal property given to employees in recognition of length of service or safety achievement are not subject to the $25 limitation, but the awards must not be a form of disguised compensation. However, the award does not qualify for employee achievement award treatment if the employee has not worked for the company for at least five years or if he has received such an award within the past five years. In addition, safety awards given to managers, administrators, clerical or professional employees do not qualify as safety achievement awards. Copyright 2010 LexisNexis, a division of Reed Elsevier Inc. |