Tis the season of Secret Santas and Holiday Company Parties.
It’s a common tradition among businesses to get in the holiday spirit and give gifts to clients and employees. Even though giving gifts doesn’t typically put the idea of taxes in mind, it’s important to know how to report business gifts as tax deductions.
What are direct gifts versus indirect gifts?
The IRS will give the green light on a tax deduction for two types of gifts; direct and indirect. Don’t worry – this still gives you substantial leeway to choose that perfect gift this year. Direct gifts are given as part of a direct professional relationship. For example, the owner of 123, LLC gifts a Godiva gift basket to each employee for the holidays. Indirect gifts typically involve a middleman, such as sending a gift home for your employee’s child.
Is there a cost limit?
There is a $25 limit per gift, per year. What’s that mean? Well, let’s say that your company likes to give gifts to clients or employees multiple times per year. The deduction would only apply to ONE gift and only $25 of that gift could be deducted.
Keep in mind that the gift CAN cost more but only $25 of the total can be reported as a deduction (so hold onto that ‘#1 BOSS’ title and keep giving your employees those iPad minis).
Does the cost include incidentals?
Some gifts will need to be wrapped and shipped. Or maybe you want to add an engravement. These types of little ‘extras’ can add up and will need to be paid for but are not eligible in the $25 tax deduction cost.
There’s one exception…
There is an exception to every rule… even in taxes. Your company gifts are 100% deductible if all three of the following apply:
- each is valued at $4 or less
- each gift is engraved or permanently imprinted with the company’s name or logo
- each gift is identical to others that are widely distributed by the company
You know what I’m talking about. These are the standard mugs, pens and gift sets that are typically gifted around holidays and birthdays.
…And a loophole?!
Now for the loophole. If you’re giving the gift of entertainment this year, than you’re in for a treat. Entertainment gifts are up to 50% tax deductible. These gifts typically include concert tickets, sporting event tickets, movie passes and even vacations!
So if you’ve been hoping for 2016 Super Bowl tickets, gift your client a pair and hope they choose YOU as their plus 1 (you’re welcome).
Taxes are tough; gift-giving doesn’t need to be.
With the holidays around the corner and your business in full swing for the season, picking out gifts is probably last on your To-Do list. Here at Rapidtax, we know that the holidays aren’t all about getting gifts. You shouldn’t ONLY be giving gifts on account of increasing your tax deductions for the year. However, if you do decide to gift this year, make sure that you are correctly reporting them on your tax return.