In the midst of the holiday season, gift-giving is on the forefront of many minds. Giving gifts to clients, employees, and others is a necessary part of business to help maintain relationships in the market. A gift is defined as something given voluntarily without payment in return. The deductibility of gifts to others is not as attractive as most taxpayers would like it to be.
The limit for deducting business gifts is $25 per individual. This limit was put into place in 1962, and has never changed. This limit did not present itself as a controversial issue 54 years ago, but today it is unreasonably small for most businesses. Since 1962, the purchasing power of the dollar has drastically declined. The purchasing power of $25 in 1962 is equal to $196 today. With economic growth and inflation continually on the rise, one would think this limit would be increased in the 54 years the law has been in place. But with that said, there are exceptions to this limit of $25:
- Gifts are limited for each individual. When gifting to a married couple, if you have a bona fide, independent business connection with both spouses, the limit is $25 per person. This will then make the total limit $50.
- Giving gifts to your employees. Gifts considered de minimis will not be taxable to an employee. These are non-cash gifts that are provided infrequently and have a nominal value. Examples of de minimis gifts include holiday turkeys and hams, flowers, and nominal gifts for birthdays/holidays.
- While there is no set amount for how much is nominal, the IRS did consider a benefit of $100 to not qualify as nominal. Therefore, it is common to see a $75 limit to these gifts.
- However, gifts awarded for safety or length of service may be non-taxable to the employee provided the value of the gift does not exceed $1,600 (please refer to the IRS Fringe Benefits guide for detailed information or forward questions to your CPA).
- If the gift is in excess of a limit to be considered non-taxable to the employee, then it should be treated as compensation. Any cash or cash-equivalents (gift cards) will also be considered compensation. When the gift is treated as compensation it will also be subject to FICA and federal withholding. While the business maintains the deductibility of the gift treated as compensation, the employee will have increased wages in this situation.
- Indirect costs in making or delivering gifts. The indirect costs of making or delivering gifts are not subject to limitation. Incidental costs, such as engraving jewelry, packaging, or mailing a gift are not included in the $25 limit. Therefore, it is important to not include these costs while tracking value of gifts made.
- Gifts for entertainment purposes. Gifts that serve a dual purpose, like tickets to entertainment events, are more complicated. Any item that might be considered either a gift or entertainment, generally will be considered entertainment for tax purposes. If the taxpayer goes with the customer or client, it is considered entertainment. However, if the taxpayer does not go with the customer to the event, then the taxpayer can choose to treat the cost of the tickets as either a gift expense or as entertainment expense, whichever is more advantageous.
The IRS has a detailed guide on Fringe Benefits for Employees. Please review those guidelines carefully, and be sure to check with your CPA for clarification.
