The holiday season is a wonderful time of year to spend with your loved ones and to make them feel special with that perfect gift. As a small business owner, the following question has probably crossed your mind: “Does the IRS allow business owners to write off gift expenses as a tax deduction?”
Miami audit firm Verdeja, De Armas & Trujillo, LLC has the answer: “It depends.” The IRS has certain rules that one needs to abide by in terms of tax-deductible gift giving. We have listed some scenarios in which the IRS considers gifts deductible.
Before creating your gift-giving list, keep in mind that the IRS considers gifts to be deductible only when they are given to colleagues (employees) or clients. However there is a limit on how much business owners are permitted to spend.
There is a cap of $25 per gift to each individual that can be claimed as a business expense. If a business owner, though, decides to exceed that limit, the gift cannot be written off. For instance, if a business owner were to buy $200 worth of gifts, only $25 of that could be written off on a tax return.
When researching IRS rules for gift giving, there are two basic categories: direct gifts and indirect gifts.
• Direct gifts are gifts that are given directly from the business owner to the recipient.
• Indirect gifts are given from the business owner to the recipient via a middleman.
It’s imperative that you understand the distinction between these two categories, because of the $25 deductible amount the IRS sets for each gift per recipient. Our Miami audit firm would like to ensure that these types of gifts are kept in mind when calculating your gift budget.
Incidental costs typically refer to any extra cost (i.e. shipping fees) included with the gift. If you need to send a gift to someone via mail, keep in mind that you will not be able to write off these extra fees because it doesn’t make the gift more valuable than it is actually worth.
Though most types of gifts consist of a $25 deductible limit, there are gifts that can deduct up to 50% of entertainment-associated business expenses. For instance, giving a client or colleague a ticket to a Broadway show can be written off as an entertainment-associated business expense. These types of gifts have the possibility of offering more tax savings than the conventional $25 gift deduction option.
At Verdeja, De Armas & Trujillo, LLC, our Miami audit firm would like to ensure that your business creates lasting connections with clients and colleagues this holiday season. Our team of dedicated professionals in our audit department provides compliance auditing, reviews and compilations for our clients to ensure that everything is up to par in terms of claims for the upcoming tax season. Contact us today for a consultation!