With the holidays upon us, there are severals reasons why you should purchase gifts for your employees, associates and customers. For instance, gifts can strengthen business relationships, open new opportunities and say thank you for a job well done. However, there is one reason, in particular, that proves to be extremely beneficial: tax deductions.
Under certain tax rules, all or part of the cost of your business gifts can be considered tax deductible. We have provided you with a guideline as to how to qualify for tax deductions for business gifts.
As with many tax deductible items, there is a limit as to how much you can spend on business gifts. While you are free to spend what you like, the IRS will only recognize up to $25 per recipient. It is important to remember that the limitation is per person, not per gift, so gifts purchased for the same person, even if totaling more than $25, will only be eligible for the $25 deduction.
When purchasing business gifts, it is important to understand incidental costs and the intrinsic value of the gift. Extra costs, such as gift-wrapping, shipping, handling or monogramming, are considered incidental costs and cannot be included in the total value of the gift or used for tax deduction.
The IRS subdivides business gifts into two categories – indirect and direct. Indirect gifts are given to a person via another person, such as a gift given to an associate that is intended for the associate’s spouse. Direct gifts are given directly to the person intended. It’s important to note the difference as the IRS only allows tax deductions per recipient.
If your gift giving extends to entertainment, this cost can be considered an entertainment expense, which is an automatic tax deduction of 50 percent of the cost. Entertainment gifts or entertainment expenses come in the form of concert tickets, movie passes, sports tickets, and even hotel and vacation stays.
It is important to remember that taking deductions necessitates good record keeping. Make sure to keep accurate records of business gift expenses, including the date, the name of the recipient, the cost of the gift and the receipt. Should the IRS have any questions regarding your taxes, you have the records to substantiate your claims.
At Verdeja & De Armas, our team of Miami tax consultants is dedicated to providing independent and unbiased tax recommendations for businesses and business interests of all sizes. Contact us today for a tax consultation!