Business Gift Deductions and What you Need to Know

Business gifts are a great way to show appreciation to your clients and employees, and if managed properly, offer tax advantages. Since 1962, the IRS rule - the $25 Rule - limits business gift deductions to $25 per person annually. With careful planning and recordkeeping, you can maximize these deductions on next year’s tax returns.

Avoiding the $25 Rule

There are exceptions to the rule that allowed business owners to deduct more than $25 per gift.

1. Gifts to Businesses

   The $25 limit applies to gifts for individuals, whether given directly or indirectly. Gifts to a company for business use are fully deductible unless they mainly benefit a single person, in which case the $25 rule applies.

2. Gifts to Married Couples

   If you plan to gift a married couple one joint gift, the $25 Rule increases to $50, with the limit applying individually to each spouse.

3. Incidental Costs

   The expenses of personalizing, packaging, insuring or mailing a gift don’t count toward the $25 limit and are fully deductible.

4. Employee Gifts

   Cash gifts or gift cards count as taxable wages, so they can usually be deducted as compensation. On the other hand, inexpensive noncash items like company-branded products, small holiday gifts, or occasional meals and gatherings are considered nontaxable "de minimis" fringe benefits. These perks are both tax-free for employees and deductible by the business.

Entertainment Gifts

The Tax Cuts and Jobs Act eliminated deductions for entertainment expenses, including tickets to events, even for business purposes. However, if you gift event tickets without attending, you may count the cost as a business gift and make a deduction under the $25 Rule.  

Note: Meals served at an entertainment event may still qualify for a 50% deduction, as long as they are itemized separately on the receipt.

Keep Good Records

To claim your full deductions, keep clear records of each gift’s description, cost, date, business purpose, and recipient’s relationship to your business. Digital documentation like accounting notes or CRM entries, is acceptable support for your deduction.

Keep records of qualifying expenses in a separate account to make them easier to find when it’s time to file taxes. With some knowledge and careful planning, you can make your business gifts both meaningful and tax-efficient.

If you need assistance reviewing your company’s gift policies or understanding how deduction rules apply to you, feel free to reach out to our office. We’ll help ensure your business remains compliant with tax laws while you express gratitude to your customers and employees.