How to deduct client gifts

by Dec 3, 2020Bookkeeping

Do you send client gifts?

Be careful!

The IRS has specific limitations on deducting gifts, and it may surprise you.

$25 Limit (yup you ready 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 treated as taxable income to the employee or client.

Sure, you can totally 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

This is why I love GREETABL  you can easily send a nice gift under $25 the limit.

If you go this route you’ll need to keep record of the gift – Keep a copy of the receipt and make sure it shows who the gift was for. (if not add a little hand written 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 totally spend more than $25 you just can’t deduct over the limit)

(remember that does not include shipping, engraving or packaging)

Yes this does get a little intense with paperwork and trackign – 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 the reach of your brand, 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.

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References 

Publication 463, Travel, Entertainment, Gift & Car Expenses
https://www.irs.gov/forms-pubs/about-publication-463

Publication 535 (2018), Business Expenses
https://www.irs.gov/publications/p535

IRS FAQ: Are business gifts deductible
https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses-8

 

– Tiffany Bastian

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