Relationships with your clients and employees are what keeps a great business thriving. 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 a "transfer of property by one individual to another while receiving nothing, or less than full value, in return". The deductibility of gifts to others is not as considerate as most taxpayers would like for it to be. The limit on business gifts, which was enacted in 1962, is $25 per individual. This limit did not present itself as a controversial issue 56 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 $210 today. With economic growth and inflation continually on the rise, one would think this limit would be increased in the 56 years the law has been in place. But with that said, there are exceptions to this limit of $25.
Here’s a few ways around the limit:
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 minimus will not be taxable to an employee. These are non-cash gifts that are provided infrequently and have a nominal value. Examples of De minimus gifts include holiday turkey and hams, flowers, and nominal gifts for birthdays/holidays. While there is no set amount for how much is nominal, it is common to see a $75 limit to these gifts. The IRS does consider a benefit of $100 not to qualify as nominal. However, gifts awarded for safety or length of service are non-taxable to the employee, provided the value of the gift does not exceed $1,600.
Amounts in excess of the limit 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, 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. If, however, the taxpayer does not go with the customer to the event, the taxpayer can choose to treat the cost of the tickets as either a gift expense or as entertainment expense, whichever is more advantageous. However, with the new rules starting in 2018, entertainment expenses cannot be taken as a deduction for tax purposes.
Gifts to another business. Gifts given to a company for specific use in the business are not subject to the $25 limit. However, if a taxpayer makes a gift to a business entity that is intended for an individual who is an employee, stockholder, or other owner of the business entity, the gift will be subject to the deductible $25 limit.
While we can't increase the limit, we can offer these suggestions to help you strategize your gift giving initiatives this year.
