Gifting season is upon us! And if you're a self-employed business owner, you’re likely gearing up to thank the employees, clients, customers, and partners that you’ve worked with throughout the year.
To get the most bang for your buck, and maximize savings during this notoriously expensive time of year, it is important to understand what qualifies as a gift, what qualifies as entertainment, and how to properly deduct each expense.
Business Gifts & Deductions
Gifting Clients or Customers
Tangible client gifts are subject to a $25 deduction limit per recipient as well. Gifts can include things like fruit baskets, floral arrangements, key chains, books, gift baskets, wine, gift cards, and clothing, among other items.
Marketing items, however, are not included in the $25 limitation. So, if you’re giving gifts with your business name on them, that are under $4 each and are one of many identical items, they are then treated as an advertising expense.
Incidental costs associated with gift purchases, like gift wrapping, shipping, or insurance are generally not included in the cost of the gift. And incidental costs cannot increase the overall value of the gift. If the cost of the incidental item, such as a decorative box, increases the value of the item, then it is added to the cost of the gift and subject to the $25 limit.
When you buy gifts for employees it is not as simple as making the purchase, wrapping it, and reporting the expense in your books. There are three different categories of employee gifts, and they are each handled differently.
- De Minimus Fringe – There is an IRS distinction for gifts with a value and frequency are so small that accounting for it is unreasonable and impractical. Examples include buying coffee or doughnuts for your staff or purchasing a token gift for birthdays, holidays, and employment anniversaries. These gifts are subject to a $25 deduction limit and are not considered taxable income
- Taxable Income – If you give your employees gift cards or gift certificates, the amount would be considered taxable income, since it is essentially being used the same as if you had given them cash. You can deduct the full value of the gift card or certificate as a business expense, but you must withhold payroll taxes on the amount.
- Award – You can award an employee, such as for meeting safety standards or as a service award. The award must be tangible personal property, like a watch or pen. The value of the award is not considered taxable income to the employee and can only be given out once every five years per employee, and only after five years of employment. So yes! You can "award" yourself a new watch every five years - but only $1,600 of the gift is considered tax-free.
Entertainment Expenses & Deductions
Entertainment encompasses any activity generally considered to provide entertainment, amusement, or recreation. Examples include taking clients or customers:
- to a nightclub or bar
- to a social, athletic, or sporting club
- to the theater
- to a sporting event
- out on a yacht or sailboat
- hunting or fishing
- on a trip or vacation
Entertainment can also include the costs of providing personal, living, or family needs to an individual like a hotel or rental car. So are membership dues - these include membership fees for:
- Country clubs
- Golf clubs
- Athletic clubs
- Airline clubs
- Hotel clubs
It is also important to note that your business industry may dictate what is considered an entertainment expense and what isn’t. If the activity is typical to your business then it may be an allowable expense. For example, if you're a realtor and your client buys their dream home, you may gift them a branded knife set or charcuterie board to promote your business. The cost of the gift is typical for your business and may be deductible as advertising or marketing rather than entertainment.
Before the Tax Cuts and Jobs Act (TCJA), businesses could deduct up to 50% of expenses for entertaining clients. But starting in 2018, these entertainment expenses are no longer deductible. The good news is, there are some exceptions! Expenses that are still 100% deductible include:
- Entertainment and meal expenses that are treated as taxable employee income
- Recreational expenses for employees
- Expenses related to attending business meetings or conventions
- Entertainment, food, or beverage costs that are sold to customers for full value
- Entertainment, food, or beverages that are made available to the public
- Meals and entertainment reported as taxable income to a non-employee
So, if you want to take a client out to play golf or see a concert, none of the associated expenses are deductible. But you can deduct 100% of the cost of throwing a company-wide holiday party for your staff.
How to Maximize Tax Deductions
The key to maximizing gift-related deductions is tracking. To stay compliant, it’s important to maintain thorough, accurate records. When you’re purchasing a gift or entertainment-related expense, keep the receipts, and include the names of your clients on them.
You’ll report these expenses on your business tax return, and they’ll be added into the total deductions against income. It is also important to distinguish between gift expenses, which are deductible, and entertainment costs, which can be more difficult to deduct.
Have questions about whether your entertainment expenses are deductible? Need help determining how much of your gift expenses are allowed? Curious about how you can save on your tax bill? Our team of experts is here to help you maximize your financial well-being.