The holiday season is upon us. So like many business owners, you want to send a gift to a business associate, a referral source, a key customer or your favorite CPA to foster goodwill.
Unfortunately, when it comes to gift giving, Uncle Sam is more like Uncle Scrooge.
Why? Because Uncle Sam only lets you take a tax deduction for gifts to one person of up to $25 per year. So, if the value of all your gifts to one person during a tax year exceeds $25, then you can only deduct $25.
If you thought trying to find a gift for the man who has everything is tough, try finding a nice business gift for under $25.
Well, at Gedeon Law & CPA, we’ve come up with some creative options to get around the $25 rule when it comes to gift giving.
The first option is to give a company wide gift because the $25 limit only applies to gifts to a specific person and not a gift to an entire company. So rather then send a gift just to the President of your key customer, instead send a gift basket that can be shared by your key customers employees. Gifts that don’t benefit a specific person are not subject to a deduction limit.
Another option is to gift tickets to sporting events or the theatre because the $25 gift limit doesn’t apply to gifts that are considered entertainment. The key, however, to claiming this gift as a tax deduction is you don’t go with the recipient of the gift to the event. So, say you know your favorite CPA is a really big hockey fan and to thank your CPA for reducing your tax liability you gift two premium tickets to the Los Angeles Kings vs. Toronto Maple Leafs game valued at $600, the tickets can be deducted as an entertainment expense, subject to the 50% entertainment limit of course.
And don’t forget, in case you ever are audited by Uncle Scrooge, you’ll want to document the following information to ensure your gift is tax deductible:
- cost of the gift
- date of the gift
- description of the gift
- business purpose for the gift and
- your business relationship to the person receiving the gift
Some of the more common business purposes we advise clients to document are: (1) maintaining the existing relationship with select customers for future business and (2) encouraging a referral source to provide future referrals.
So, as you can see, with some creative planning, you don’t have to let Uncle Sam be the Grinch who stole the joy of gifting.