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March 2007 Gift deductions for business owners There are exceptions to the $25 per person limit on business gifts that can remove the lid on deductibility Most business taxpayers are at least vaguely aware of the tax rule that limits the deduction for business gifts to $25 per person per year—a limitation that hasn’t been raised in decades. What isn’t as widely known is that there are a few exceptions to this rather restrictive limit. When one of these exceptions applies, you typically have no limit (or at least, a much higher limit) on the deduction for business gifts. Here’s a quick rundown of the major exceptions to the $25 limit. Gifts to a business entity versus an individual. The $25 limit applies only to gifts directly or indirectly given to an individual. Thus, gifts given to a company for use in the business aren’t subject to the limit. Even gifts such as tickets to a sporting event or the theater can avoid the limit under this exception if given in a situation where the taxpayer doesn’t reasonably know who will use the gift. Thus, four $30 tickets to a major league baseball game given to a large company’s accounting department for use by whoever wants them in the department would generally be deductible for the full $120 cost. Gifts to a husband and wife. If you have a business connection with both spouses and the gift is for both of them, the $25 limit doubles to $50. Gifts to employees. Although they have their own limitations and may be treated as compensation to the employees, an employer is allowed to deduct the costs of gifts made to employees. Gifts versus entertainment expenses. Entertainment expenses are normally only 50% deductible, and gifts are typically 100% deductible, but only up to the first $25 of cost per recipient per year. In some situations related to gifts of tickets to sporting and other events, a taxpayer has a choice of whether to claim the deduction as a gift or as entertainment. The gift deduction is a better deal for lower priced tickets, but once the combined price of the gifted tickets exceeds $50, claiming them as entertainment expense is more beneficial. Only direct costs are limited. The incidental costs of making a gift aren’t subject to the limit. Thus, the costs of custom engraving on jewelry, and the costs of packing, insuring and mailing a gift are deductible over and above the $25 limit for the gift itself. Record keeping. As you can see, there are several exceptions to the $25 rule. To the extent your business qualifies for any of them, it’s important that the qualifying expenses be tracked separately (typically by charging them to a separate account in your accounting records) so that you can claim a full deduction. If you have any questions regarding the types of gifts or gift-giving situations that may qualify for a full deduction or how to properly isolate and account for them in your records, please contact your Schmidt Westergard & Company professional for the right answers. Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market. |