Are Gifts to Customers Deductible?

This time of the year it’s nice to let your best customers know that you appreciate their business with a small token of your affection. With the holidays upon us, small business owners are making their customer gift lists, but it would be wise to check them twice. Holiday gifts have important tax implications that can save your small business some money. But if handled incorrectly, it could land your business on the Internal Revenue Service’s Christmas list of tax offenders.

We offer four simple ways to keep your small business office from Uncle Sam’s “Naughty List.” According to tax experts at Fiducial, now is the time to prepare your gift list properly, in lieu of the upcoming tax season.

“Complex tax laws should not make small business owners shy away from giving business gifts this holiday season,” said Andrew Martin, tax support manager at Fiducial. “Giving gifts to customers can prove to be good for marketing and good for cementing client relations. But business owners need accurate information to avoid missing out on tax deductions or even facing penalties for filing taxes incorrectly.”

As a leading business outsourcing firm offering tax services to small businesses, Fiducial offers these four tips to small business owners this holiday season:

1. Know deduction limits: No matter how much is spent on a business gift, as a general rule, only $25 is tax deductible per business gift recipient per year.
2. Incidentals may be deductible: Even though only $25 is deductible for business gifts, business owners should remember that incidental expenses related to the gift also may be deductible. Incidentals include anything that does not add significantly to the value of the item, such as shipping or engraving costs.
3. Know who qualifies as a legitimate business associate: To receive a tax deduction for a business gift, the recipient of the gift must be a legitimate work associate. Acceptable recipients can include customers, clients and co-workers. A gift given to a customer’s child can be deducted, but it is still considered a gift to the business associate. So, business owners should be careful not to count the same person twice when calculating deductions.
4. Keep good records: Remember to record the date, name of the business associate and the cost of the gift. If audited by the IRS, business owners must show a receipt to receive a deduction.

Martin advises that small businesses seeking to take advantage of these deductions should be aware that certain practices that tend to raise red flags with the IRS. He said one of the tax agency’s leading indicators that something is amiss occurs when the IRS notes that a company is claiming larger than normal deductions.

“This warning is especially important for new business owners who have not yet established a long track record with the IRS,” Martin said. “Companies that accidentally claim unwarranted deductions will be required to pay the difference of what they owe plus interest and penalties to the IRS. No business owner wants to find Uncle Sam on his Christmas list.”

Through more than 600 offices located across the U.S., Fiducial works with small business owners and individuals helping them to navigate difficult tax laws and other back office functions. Established in Europe in 1970, Fiducial is currently the ninth largest accounting firm in the U.S. and the thirteenth largest in the world.