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When the holidays roll around, many companies that aren't in retail or consumer services face a major slowdown in business. For companies that are not overrun with holiday shoppers, the holidays are a great time to consider doing some marketing. One popular marketing tool is the customer a gift.
While businesses may be loathe to spend money on gifts for customers, doing so can actually serve an additional purpose besides just marketing. For businesses, customers gifts are tax deductible (only to an extent, of course).
Limits on Customer Gifts
While the IRS allows businesses to take tax deductions for customer gifts, the rules for doing so are strict. Although a business is free to spend as much as it would like on the gift, it will only be allowed to deduct up to $25 per year for each gift and/or gift recipient. A business can give one person 100 gifts, but they will only be allowed to deduct a total of $25 for all the gifts that one person received. However, if a business gives 100 $25 gifts to 100 different people, they will be able to deduct $2,500 ($25 for each recipient).
Additionally, there is a prohibition on deductions for gift-related incidentals. Gift-related incidentals include things like gift wrapping, delivery, engraving, or insurance. Basically, anything that doesn't actually add value to the gift itself may be considered an incidental and thus is not deductible.
Entertainment and Branded Swag
Concert and sporting tickets are often popular gifts from businesses to customers. However, tax deductions for entertaining clients are not necessarily limited by the $25 gift deduction limit. Unlike a gifted item, a business can deduct 50% of their customer/client entertainment costs.
Generally, if a business rep is present with the customer at the event, such as a ball game or dinner, the business will have to treat the expense as an entertainment expense. However, if the business just gives the customer the tickets and does not accompany the customer, then the business is free to claim which ever deduction is the most advantageous.
Lastly, there is an exception for branded collateral. The IRS really doesn't care how many of your business's branded pencils, mugs, sticky-note pads, or other little items you give away so long as they are under $4. The IRS does not consider these items to be gifts for the purpose of the $25 limit.
While you may be excited to start adding up some customer gift tax deductions, you may want to talk with your tax professional first to make sure you would actually benefit from a deduction.