Are Client Gifts a Tax Write-Off? 5 Simple Rules
Put aside your feminist leanings for a second and let’s all agree on a simple fact: there isn’t a man or woman alive who doesn’t want to be treated like the female love interest in a romantic comedy. Whether it’s being showered with expensive jewelry that will single-handedly fund your retirement, stunning floral arrangements that will die in less than a week, or expensive dinners that give you a chance to finally wear those fancy heals you bought three years ago. All of these romantic gestures serve a singular purpose: to make the love interest feel wanted and desirable (and to make the guy look rich and successful, obviously). In this article, we are going to dive into another great freelancer tax deduction benefit.
This same strategy is frequently used in the working world. Building and maintaining a strong client base is every contractor’s biggest headache, and giving gifts to clients is an effective way to secure business (what idiot leaves the person who sends them Moose Munch Popcorn every Christmas??).
There are five simple guidelines taxpayers have to follow in order to write-off their gifts:
Rule #1: The gift must be under $25 per person
This amount is restrictive partially because the IRS doesn’t want taxpayers to take advantage of the write-off, and partially because the amount hasn’t been updated since 1954. Before you remove that lovely fruit basket from your shopping cart however, let’s discuss some options. First of all, the limit is $25 per person, not per client. So if your client has an office of 5 people, you can write-off a gift of $125 if it’s to the entire office.
Additionally, the IRS allows you to write-off “incidental” costs as long as they don’t add value to the gift. So expenses like engravings, packaging, shipping, sales tax, etc. would all be eligible even if it makes the cost of the gift exceed $25.
Rule #2: Indirect gifts count towards the $25 limit
An indirect gift is a gift to either the client’s business or a relative. For example, if you gift your client’s office a $250 coffee maker, and they have an office of 10 people (10 x $25 = $250), you can’t also give your client a $25 box of chocolates. Why? Because their $25 was indirectly counted towards the coffee maker. The same principle applies when giving gifts to a client’s spouse, child, or other relative.
Rule #3: Spouses can’t give separate gifts to the same client
This one definitely ruffles feathers, especially for spouses who operate different businesses and keep their work separate. According to IRS regulations, spouses count as one taxpayer when it comes to writing off client gifts. Let’s look at an example:
Mary owns an accounting business, her husband, Chris, is a freelance architect. Chris designs a building for a marketing firm called High Class Ads LLC. Mary, coincidentally, does the accounting for High Class Ads. Around the holidays, Chris and Mary both send $25 gifts to High Class Ads thanking them for their business. Since Chris and Mary are legally married, however, they are counted as one taxpayer for the purposes of this write-off and can only expense $25 between them (let the rock-paper-scissors begin!).
Rule #4: Gifts under $4 are exempt
The IRS makes an exception for small gifts that list your company information and are handed out on a regular basis. Classic examples are pens that have your company name, buttons with your company logo, or custom notepads that list your business contact information. Basically, anything that works as a virtual business card and costs less than $4 (excluding incidental costs) can be written off.
Rule #5: Entertainment can't be a gift
This is a big one. Beginning in 2018, entertainment expenses can no longer be written off on your taxes (prior to the Tax Cuts and Jobs Act, 50% of entertainment expenses that had a clear business use could be written off). If the gift your giving to a client would count as “entertainment,” it is ineligible for this deduction. Remember that when you are tracking your business expenses. Examples include tickets to sporting events, boat rides, wine tasting, spa days, etc. Basically, steer clear of activities.
The bottom line
While it’s tempting to take the easy route and shower your client with gifts, it’s probably not the smartest use of your money for tax purposes. Instead, put your energy towards building long-term relationships with your clients, and invest your resources into making your services invaluable to your customers (with or without the Moose Munch Popcorn).
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At Keeper Tax, we’re on a mission to help freelancers overcome the complexity of their taxes. That sometimes leads us to generalize tax advice. Please email firstname.lastname@example.org if you have questions.