They say it’s better to give than to receive, but the people you depend on at work may disagree!
From clients to employees, lots of people support the success of your business. You may just want to show your appreciation with a nice gift or two.
But just how much is all that appreciation going to cost you? Probably not as much as you think!
The business gifts you buy for clients and employees are tax-deductible. If you’re a freelancer or small business owner, here are 7 tax rules to keep in mind when you’re writing them off.
Rule #1: Only tangible items count as business gifts
If you’re wondering what qualifies as a business gift, the IRS’s definition is quite narrow: it pretty much has to be a physical item.
This means things like:
- 💐 Gift baskets
- 🍫 Chocolate
- 🍷 Wine
- 🍓 Fruit
- 🧀 Cheese platters
- ☕ Coffee makers
- ✒️ Fancy pens
To name a few. Basically, if you can buy in a retail store, you’re probably okay. Yay, consumerism!
There is one exception, though: gift cards.
Can you write off gift cards on your taxes?
No, gift cards and gift certificates don’t count as a tax-deductible expense, even if you’re giving them as a gift to a client. In addition, any cash (or cash equivalents) count as taxable income for the recipient.
That makes them the major exception to the walk-into-a-store rule of thumb we talked about above.
Are event tickets a business expense?
No, you can’t write off the cost of tickets as a business expense. At least, not anymore. Prior to 2018's Tax Cuts and Jobs Act, 50% of “entertainment expenses” like these could be written off, as long as they had a clear business use.
These days, however, entertainment no longer qualifies for a gift deduction, so they’re not the most tax-savvy gifts you can give. Think things like:
- ✘ Tickets to a sporting event or concert
- ✘ Boat rides
- ✘ Wine tastings
- ✘ Spa days
Instead of event tickets, try a nice meal
There is one small workaround if you want to show your client a good time: taking them out for a meal! If you accompany them and discuss business over your entrées, you can write your meal off as a business expense, rather than a gift.
To sweeten the deal, business meals are 100% tax-deductible for the 2022 tax year as long as you have them at a restaurant. Normally, they’re only 50% deductible.
Rule #2: Gifts to clients must be under $25 per person, per year
That’s right, no diamond necklaces or top-of-the-line gaming consoles this year. If you want your client gift to count as a business expense, you’ll need to keep the price low.
Why just $25? It’s partly because the IRS doesn’t want taxpayers to get too much of a tax deduction, and partly because the amount hasn’t been updated since 1962.
Thankfully, the limit is $25 per client, not per person. So if you want to thank a business that consists of five people, you can write off a gift of $125. That’s $25 per person, times five people.
Of course, this only applies if it’s a gift for the entire office, like a fancy coffee machine everyone can share. (So in a sense, a Nintendo Switch could fly, if you’re buying it for the employees at a large enough company!)
Does the $25 limit include shipping and handling?
Luckily, no! The $25 is just for the item itself.
The IRS also allows you to write off “incidental” costs, as long as they don’t add value to the gift. So you can go over the limit for expenses like:
- 📫 Shipping
- 🎁 Packaging and gift wrapping
- ✨ Engravings
- 🧾 Sales tax
Rule #3: You need to track your business gifts
As with most things on your taxes, accurate records are key. If you want to write off your gifts, you need to be able to show the IRS what you bought:
When tracking your business gifts for the year, jot down the following information:
- How much you spent on the gift
- A description of the gift
- When you purchased the gift
- Who you’re giving the gift to (and what your business relationship is)
- The reason for giving the gift
Want an easy way to find all those gifts come tax time? Keeper can automatically track your purchases, including business gifts! It can even file your taxes for you, saving the hassle of adding up the full total of your generosity.
Rule #4: Indirect gifts count towards the $25 client limit
An indirect gift is a gift to either:
- The client’s business
- A relative of theirs
For example, you can write off the $250 you spent on a new coffee pot for an office of 10 people — remember rule #2!) But once you do, you can’t also write off a $25 fruit basket for the business owner. You already counted them in the $250 total.
The same applies if you buy a gift for a client’s spouse or family member. You’ve used up your $25 limit, and can no longer write off a direct gift to the client.
Rule #5: Married couples can’t give separate gifts to the same client
Entrepreneurial couples, take note: If you both do business with the same client, only one of you can write off their thank-you gift come tax time.
For example, let’s say that Laura is a successful freelance writer, and her wife, Isabella, has a thriving side hustle selling handmade jewelry. These are clearly separate businesses, but they still have to follow this rule.
Let’s say Isabella gets some of her jewelry into a local boutique to sell on consignment. At the same time, Laura gets commissioned to write content for the retailer’s website.
Both of them want to send the boutique a holiday gift. But they’ll have to toss a coin to figure out who gets the write-off.
Rule #6: Gifts under $4 are exempt from the client gift limit
The IRS makes an exception for small gifts that are:
- ✓ Under $4
- ✓ Emblazoned with your company logo
- ✓ Handed out on a regular basis
A few examples might include:
- 🖊️ Pens
- ⚡ USB drives
- ⛳ Golf tees
- 🗒️ Notepads
- ⚪ Pins and buttons
These are basically promotional materials with your company name on it: they act like business cards.
That’s why you can freely write them off even if you give them to a client who’s already gotten $25’s worth of gifts from you.
Rule #7: You can write off employee gifts… but they might be taxed
The good news: If your business has any employees, you can write off the gifts you give them. You don’t even have to deal with any kind of specific spending limit.
The bad news: Unless the gift is very small and not part of your regular business practice, your employees are likely to owe taxes on it. To make matters worse, you’ll have to factor in its value when you’re doing payroll taxes.
How to give your employee gifts that they won’t be taxed on
To thank employees without additional paperwork, you’ll want to stick with what are known as “de minimis fringe benefits.”
The IRS defines these as a gift where “the value of which is so small in relation to the frequency with which it is provided, that accounting for it is unreasonable or administratively impracticable.”
In other words, think:
- ✓ Low-value items
- ✓ Infrequent
- ✓ Not something your employees should expect on any regular basis
For a safe bet, it's a good idea to stick to small tokens meant to commemorate special occasions. Some examples of gifts might include:
- 👕 A t-shirt or coffee mug when they join your company
- 🧁 A cupcake on their birthday
- 🍗 A turkey or ham around the holidays
- 💐 A nice bouquet when they get married
Note that cash and gift cards generally will be taxed, so steer clear of those if you want to keep your payroll simple as an employer..
Is a gift to a contractor taxable?
Maybe — your independent contractors can be taxed on gifts you give them if they aren’t small enough to count as fringe benefits. Of course, you wouldn’t have to account for contractor gifts when you handle payroll taxes, since those only apply to your W-2 employees.
When to report contractor gifts on a 1099 form
If you hire 1099 contractors and want to thank them for a job well done, know this: all cash bonuses would have to be reported on any 1099-NECs that you file for them. But you wouldn’t need to report it if you send them a birthday cake or company mug.
Bottom line: While it’s tempting to shower your clients and best employees with thoughtful gifts, it’s probably not the smartest use of your money — at least as far as taxes are concerned.
Instead, put your energy towards building long-term relationships with your clients, paying your staff fairly, and making your services invaluable to customers.
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At Keeper, we’re on a mission to help people overcome the complexity of taxes. We’ve provided this information for educational purposes, and it does not constitute tax, legal, or accounting advice. If you would like a tax expert to clarify it for you, feel free to sign up for Keeper. You may also email firstname.lastname@example.org with your questions.