Thursday, December 20, 2007

Business Gift Tax Deduction - $25 per person

Don't miss the chance to write off business gifts...
The 2007 business gift deduction is something many business owners will accidentally overlook this time of year. You still have a few days left, and you can give a (small, $25.00 maximum value) tax-deductible yearly business gift to your client contacts and any employees.

I am not an accountant, and can't give legal or tax law advice, but it seems the law for business gifts and taxes is all about making sure you are giving a gift with the intention of receiving some value in return. It makes sense that you would give gifts to clients or prospects in hopes of landing more business in the future, and the IRS will gladly take their cut of any future profits that directly or indirectly arise from this act of kindness you show your business contacts. Likewise, gifts to your employees are deductible (to that $25 limit) since it is assumed your employees will return that much "value" to you for this expression of gratitude for work well done.

Gifts to Contractors, Gifts to Suppliers, etc...
I have not been able to find specific tax law wording regarding contractors you have on staff -- and perhaps other people that help you with your business (e.g., your accountant, lawyer, and perhaps others you feel would return additional business "value" after building a more friendly working arrangement), but it seems logical that you could.

Worst case is you would have to fight for your right (with the IRS) to attempt to minimize costs for your business, over a maximum of $10.00 lost in tax revenue off the $25.00 gift you gave to a supplier in hopes they would perhaps not charge you when you call them with a simple question, etc.

If you save on expenses, your business profit increases, and you pay more tax, right? So, if an act of kindness saved you even a percent or two when negotiating the best-price with your supplier for paper or office supplies or contracted services, it wouldn't take much at all to offset that tiny little gift-expense in terms of taxable profit / income later.

Once again, I am not tax expert, or accountant, but it seems like you could defend this position (logically at least - - god knows logic rarely plays into tax law though). Consult your accountant for details.

This insane, eternal, low, $25.00 limit!
The dark side of this gift tax deduction for businesses is how lame the limit is! Although it is nice that you can write-off some small items that may garner a bit of extra favor with clients and employees, I still find it reprehensible that the IRS has not raised the $25.00 limit in decades! Sure, they want to avoid rampant fraud and abuse and not lose revenue if they can avoid it, but come on guys, how about a $50.00 limit by now (though, I think $100 limit would make more sense, especially if they go back to not increasing with inflation for another decade or more).

I always try to get some little things for clients and employees every year, since it is a write-off. But, TWENTY-FIVE BUCKS!!? This has not changed in DECADES! Talk about a hidden tax increase! (since, no inflation adjustment factors are in place).

You can't buy anything TOO NICE for twenty-five dollars! So, tell your employees, "here you go -- great job!... sorry, I could only get your something simple and cheap. But thank god for those cheap Chinese imports, since it is the only way I could keep up with inflation!" LOL

At the same time, we recently cut capital-gains rates in half for even billionaires, and GWB whines on TV about how the "death tax" (formerly, pre-propaganda times known as an "Estate Tax") needs permanently removed and the capital gains tax cut needs to be permanent. It says something about our tax-law and who benefits from the larger and highly publicized changes to it, when the IRS worries about $7.00 or so tax revenue per gift, that would grow to perhaps $15/gift lost if they doubled the write-off to $50.00 maximum gift deduction, while at the same time we extend the biggest tax cuts in history to the top income brackets.

So, given the priorities of our Congress and Leaders, chances are nearly certain that the 2008 business gift tax deduction and 2009 business gift tax deduction, etc., will remain subject to the same paltry $25.00 limit. But, take what scraps they give you... you never know when they'll decide to take away this little deduction to balance another handout to a more preferred cause.

Note: if you want to read more detailed insight into this topic of giving tax-deductible business gifts, Microsoft Small Business had this article online about giving a business gift and getting a write-off, that goes into much more of the specifics behind the tax-law.
Also, consider a year-end company party...
If you have food expenses for a company party or for office snacks or meals, those expenses could be fully deductible (instead of the normal 50% deductibility for standard meal and entertainment expenses). So, if you want to buy some "good will" near the end of the year, buy lunch for the office staff and/or have snacks available or throw a nice party. It's a no-brainer for raising workforce morale while you get the full benefit of a tax write-off.

Likewise, you may want to take the opportunity to promote your products and services to the public. If your company is providing food to the public for free as part of a promotional campaign, those costs could also be fully deductible / expensed (100% vs. M&E 50% rule)

1 comment:

Pam said...

There is a general limit on business gifts to $25 per client. This is an often-overlooked deduction that I encourage my small-business clients to take advantage of...

For more on the business gift deduction, please see IRS Publication 463, "Travel, Entertainment, Gift, and Car Expenses."

A business owner is allowed to deduct $25 in costs of a business gift per client per year. Gifts to a company intended for a person count as a gift to the person, as do gifts to a spouse.

Incidental costs of a gift which do not add the value of the gift (shipping, packaging, engraving, etc.) don't count toward the $25 limit.

There are two exceptions to the gift limit:

1. An item that costs $4 or less and has your name on it, and which you widely distribute. Magnets and pens are good examples of this.
2. Promotional material to be used on the business premises of the recipient.

Any gift that can be considered either as a gift or entertainment is generally considered entertainment (and is therefore only 50% deductible, but with no upper limit on cost). If you give a pre-packaged food item to a client, that is a gift. If you give tickets to an event you don't attend, that is either a gift or entertainment (your choice). If you go with the client to the event, that's entertainment.

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