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Do Business Gifts Qualify as a Tax Deduction?
Do Business Gifts Qualify as a Tax Deduction?
They say that the best gifts are the ones you give. Giving a gift is an expression of our feelings and allows us to show our appreciation. In the workforce, it’s no different. Some employers like to give gifts to thank their employees for their work. If you’re self-employed, you might want to give a gift to your client.
Some gifts are tax deductible, while others are not. The Internal Revenue Service (IRS) has certain rules in place when it comes to business gifts as write-offs, and there is often confusion about what's deductible. There are a lot of questions to answer, like: are gifts tax deductible, can I write off gifts to clients and is a gift card taxable? Knowing the ins and outs of business gifts as tax deductions can keep you from paying more in 1099 tax than you need to.
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Key takeaways
- Many gifts to employees are taxable at both the state and local level
- Gift cards and certificates don’t count as a write-off since they're considered equivalent to cash
- If you give a gift that has very little monetary value, it’s exempt from taxation
Giving gifts
If you’re an employer and want to give your employees a gift, you should first ask yourself two questions that could save you some frustration:
- Is this a taxable gift for employees?
- Can the gift be deducted as a business expense when calculating self-employment tax?
Gift card tax
Sadly, gift cards and gift certificates don’t count as a write-off, even if they are client or contractor gifts. Giving cash is the easiest way to give a gift, but that’s also not deductible.
Awards
Giving recognition to a hard-working employee or a valuable client is a great way to show your appreciation. But thanks to the Tax Cuts and Jobs Act (TCJA), giving an award is now a taxable gesture.
Giving a cash award is taxable, whereas you wouldn't be taxed on a small gift that isn't very valuable. Anyone who receives a cash gift has to pay taxes on it as they do with bonuses and commissions.
Service Awards
Suppose you want to give a tangible gift like Lindt chocolates, a leather wallet, golf clubs or even headphones. In that case, they're exempt from taxation if given as a safety award or an award for service milestones within the company. The awards are exempt up to $1,600, if considered a qualified awards plan, or up to $400 for all other awards.
If you’ve been awarded a length of service award for completing four years at a company, this doesn’t meet the IRS qualification, as you need to work somewhere for at least five years.
Entertainment events
These days, entertainment gifts are not eligible for tax deductions. Prior to 2018, entertainment gifts could qualify for a 50% deduction. This included concert tickets, wine tastings, fishing trips and sporting event tickets.
Can I write off client gifts?
You won’t be able to write-off client gifts when paying estimated taxes, since the IRS set the client gifts tax deductible rate at $25 per person. To be able to deduct your client gifts, you’ll need to keep the price low, maybe not Target-dollar-section low, but you get the idea.
Write-off business gifts
Since the IRS limit on gifts is $25, you might be stuck buying cheap gifts until they decide to change it. But what if there’s another way? Instead of giving clients a gift per say, you could give them something with your company brand or logo on it.
Any item with the company logo or brand can be deemed a promotional item and qualify as an advertising or promotional item, which is 100% deductible.
You could give branded gifts like a:
- Cutting board
- Kitchen knife or pocket knife
- Pocket watch
- Tumbler
Are gifts to employees tax deductible?
There’s a lot of confusion around whether or not employee gifts are deductible and whether recipients have to pay taxes on the gift. The important thing to remember is the gift's value and form.
It’s nice to reward your employees for their hard work, especially during holidays or special occasions. These types of gifts are called fringe benefits and are usually considered taxable compensation for the employee. The gift you give must be included in the employee’s pay stub, so the IRS is aware.
But you can always find a loophole. When you give a gift that has very little value or would be unreasonable to account for the gift, the IRS classifies this type of gift as a de minimis fringe benefit. It must be something given occasionally and not frequently. These types of gifts are not taxable. But the gift card tax still applies and they aren’t eligible for a tax break.
Let’s say you give an employee flowers for their birthday that cost $15, and you give another employee a $15 gift card to iTunes for their birthday. Although both gifts cost the same, only the flowers are considered a de minimis fringe benefit because a birthday is something that only happens occasionally. The employee receiving the gift card would need to add it as taxable income on their tax return.
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