How To Deduct Client Gifts - The $25 Rule
Do you send clients gifts?
Be careful!
The IRS has specific limitations on deducting gifts, which may surprise you.
$25 Limit (yup, you read that right)
The IRS states: “You can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year.”
Anything over $25 could be taxable income to the employee or client. You can spend as much as you want on a client gift, but you can only claim up to $25.
To be clear, this is not per gift; this is $25 per person per year. This limit has not changed since it was enacted into law in 1954.
Good News Though,
The $25 Limit DOES NOT include the following:
Shipping
Engraving
Packaging
Websites like GREETABL. This allows you to easily send a nice gift for under $25 the limit.
If you go this route, you'll need to keep a record of the gift - Keep a copy of the receipt and ensure it shows who the gift was for (if not, add a little handwritten note).
In your accounting software or spreadsheet (however you keep track of your business expenses), you'll want to break this out..
Gifts (Deductible)
This is where you'll put the first 25.00 of any gifts with a note telling who it was for.
Gifts (Non-Deductible)
This is where you'll put anything over 25.00 (you can spend more than $25. You just can't deduct over the limit).
(remember that this does not include shipping, engraving, or packaging)
Yes, this does get a little intense with paperwork and tracking - but it's doable if you stay organized.
Or you can...
Brand Your Items for 100% deduction!
By adding your logo, you’re now extending your brand's reach, creating brand awareness, and attracting future leads.
What this means is that the $25 limit no longer applies because you have turned this cost into an advertising expense.
The IRS allows you to deduct 100% of the expenses that assist you in creating new client relationships and increasing repeat business from current clients as advertising. 🥳️
What about gifts for referrals?
One important thing to note here is that a referral gift is technically not a gift.
It's literally payment to someone for sending a client your way and bringing you business. Any cost you incur to promote your business is 100% deductible as advertising.
Referral gifts DO NOT need to be branded. So, If you send a $50 Starbucks gift card to all clients who sent you a new paying client, that full $50 is an advertising expense.
There you have it!
Most expenses classified as gifts are not really gifts at all and can be 100% deducted.
Lower your tax liability while building your brand and client relationships.
Don't forget to grab your FREE Business Expense Breakdown so you can know exactly what you CAN and CANNOT deduct in your photography business.
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