General Accounting

Are Client Gifts Tax Deductible?

by Envoice
6 min read
woman giving gift
Source: Pexels

A gift is an excellent way for business owners to show appreciation for valued clients, and it is estimated that the US corporate gifting market will reach an impressive $242 billion this year. [1]

Beyond just a feel-good activity for the company, client gifting helps strengthen relationships and sets the giver apart from competitors. But is this routine cost of doing business tax deductible?

Let’s find out.

So, Are Client Gifts Tax Deductible in the U.S.?

Yes, client gifts are tax deductible in the US. However, there are limits. 

Businesses can only deduct up to $25 in gifts per person each year. 

And these tax deduction limitations also apply to contractors or freelancers you work with.

Here are a few points to consider when allocating the said $25 budget:

  • If the client gift costs $4.00 or less, is distributed regularly, and has your business name permanently marked on the product, it doesn’t have to be included in the $25 tax deduction limit.
  • Incidental costs (gift wrapping, engraving, or shipping) are not included in the limit if they don’t add substantial value to the gift.
  • If you and your spouse give business gifts to the same person, the couple is treated as one taxpayer.
  • You need to present records to prove the details of the amount spent and the business purpose of the gift. [2]

Sometimes, firms get creative to avoid the $25 limitation on tax deductions. For instance, they print their company logo or name on merchandise so it’s excluded from the limit.

Another is treating their clients or employees to a show or meal. Although only 50% is tax deductible (categorized as entertainment gifts) to the business, it still helps in the long run.

Gift cards, co-branded items, spas, food, and wine are among the most popular gift categories that recipients prefer.

Moreover, the most acceptable price range for corporate gifts is between $50 and $150. [3]

You can also speak to a qualified tax professional or your company accountant before purchasing gifts to understand better what can be claimed as a tax deduction.

Make Tax Time Easy: How to Keep Records of Tax Deductible Gifts

To make tax less stressful, keeping a record of all gifts given to clients, employees, and contractors is essential. 

Keep records of the following information:

  1. Description of the gift,
  2. The date the gift was given,
  3. The business relationship of the business to the person receiving the gift, and
  4. The purpose of the gift.

You can choose any recordkeeping system that fits your business needs. It would be better if the tool clearly displays your income and expenses and summarizes your business transactions. 

How to eliminate repetitive bookkeeping tasks?

Book a demo

and we will show you how

Your accounting books should show your gross income, credits, business expenses, and tax deductions. 

Do you want to automate your workflow for purchases and expenses, including tax-deductible gifts? Envoice can do that for you. It’s a complete pre-accounting solution that helps businesses determine tax-deductible gifts in a few clicks.

Two Kinds of Tax Deductible Gifts

woman preparing a gift
Source: Pexels

1. Business gifts

Business gifts include those given and paid for by your company. Whether a gift is tax deductible depends on how you report and handle them. 

You can only consider the gift a deductible business expense after determining its value, form, and occasion. Gift certificates and gift cards don’t count as tax-deductible business expenses, even if you’re planning to give them to your client. 

Gifting cash to employees is also not considered de minimis fringe benefit. If you give your employees gift cards, cash, or similar items as your holiday gift, the gift is still regarded as an additional salary or wage. 

A few examples of items that would qualify as business gifts are:

  • Entertainment gifts – concert tickets, meals, trips. These are tax deductible for up to 50% of their value.
  • Promotional gifts – t-shirts, koozies, pens, key chains, and frisbees are tax-deductible as long as they have the business name printed on them, are distributed widely to several clients, and cost less than $4 per piece.

2. Charitable donations

These are gifts given to nonprofit organizations to help their mission. They are tax-deductible only if the charity is qualified. For instance, the charity is a registered 501(c)3 entity. It also needs to have a good standing for donations to be tax-deductible.

Another great thing about giving gifts to nonprofit organizations is they’re also eligible as an itemized deduction on individual income tax returns. Hence, it pays to be generous to known charitable organizations.

Gifts for Employees

As for gifts given to employees, they are also considered taxable income. You must withhold the applicable state and federal income and payroll taxes as an employee and pay employment taxes.

Gifts that employees won’t be taxed on

To show your appreciation to your employees without the additional paperwork, stick with the de minimis fringe benefits.

The IRS defines a de minimis fringe benefit as a gift “for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable and impractical.” [4]

In other words, think of gifts your employees should expect regularly or low-value items. Small tokens designed to commemorate special events may include a coffee mug hired by your company, a birthday cupcake, a lovely bouquet when they get married, and a ham or turkey around the holidays.

Gifts for Independent Contractors

beautiful flowers
Source: Pexels

1099 contractors may also be referred to as self-employed workers or freelancers. They can be taxed on the gifts you send them if they don’t fall into the fringe benefits. But this doesn’t mean you have to account for contractor gifts when preparing for payroll taxes because those apply only to W-2 employees.

Why Giving Gifts Has a High ROI

Gifts not only make a positive impression but also increase brand recognition. 

In fact, a study by the University of Zurich showed that businesses generate twice as much revenue when they send a small gift at the start of negotiations. And unique and thoughtful gifts are 2 – 3 times more effective at causing a favorable action, like turning a lead into a client. [5]

Even a small token of appreciation also goes a long way. It makes clients feel valued, building a long-lasting business relationship. Moreover, clients emotionally connected to the brand have a 306% higher lifetime value. [6]

Show Appreciation and Gain Tax Breaks

We hope this guide has helped you understand how your gifts to your clients will impact your business taxes. 

Giving gifts to clients is a win-win. It can leave a lasting impression on your client and serve as a valuable tax deduction. Of course, that’s only the case if you keep thorough records. 

If you’re still unsure what accounting tool to integrate into your business to make client gift tax deduction easy, request a demo. Envoice has been helping businesses save time on accounting. Find out how it can help yours.


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