As we approach the holiday season, you may be thinking about sending gifts to some of your clients. Or maybe you would like to thank your employees and contractors with a little year-end gift.

As a business owner and leader this is a great way to build lasting relationships and team morale! So let’s walk through exactly how you can also make these purchases a tax write-off!

Client & Customer Gifts

If you give business gifts in the course of your trade or business, you can deduct all or part of the costs subject to the following limitations:

• You may deduct no more than $25 of the cost of business gifts you give to each person during your tax year.
• Incidental costs such as engraving, packing or shipping aren’t included in the $25 limit.
• Any item that could be considered either a gift or as entertainment is generally considered entertainment and cannot be deducted.
• You need to have records that prove the business purpose of the gift as well as the details of the amount spent.

Exception 1 – If you send the gift to a business where multiple people will utilize the gift, you can multiply the $25 limit by the amount of people who will receive the gift.

Exception 2 – If you send a gift with your logo on it, it is considered advertising and marketing and there is no gift limit.

Example #1

You send your customer Molly a box of holiday cookies. The cost was $20 plus $6 in shipping. Since shipping expenses are not included in the $25 limit, you can deduct the full $26.

Example #2

You send your client Kiara an engraved mug as a holiday gift. The cost of the mug was $30, the engraving cost $3, and shipping was $5. You can only deduct $33 instead of your total spend of $38 ($25 gift limit + $3 engraving + $5 shipping = $33).

Example #3

You send your client The Popcorn Company a gift basket as a year-end thank you. The gift basket cost you $100 and was sent to the business where 8 people will receive the gift. Since this gift is being utilized by 8 people, the limit would actually be $200 (8 x $25). Therefore you can deduct the full cost of $100.

Employee & Contractor Gifts

If you give your employees or contractors occasional holiday, birthday, or other thank you gifts, they are generally a tax deduction for you and do not have to be counted as income/wages for the employee.

Generally the limit for these types of gifts is around $100. Further, the gift MUST be a tangible item. Any cash or gift cards will still be a business deduction, however it has to be included on your employee’s W-2 or your contractor’s 1099, and they have to count it as income.

Another way to thank your team is to treat your employees or contractors to a holiday celebration or meal out.  Not only is this awesome for building your team culture, but it’s 100% deductible as well! For the typical business meal, you can only deduct 50% of the meal cost; this means that for a $100 meal you only get a $50 deduction.  Fortunately, in the case of events hosted (such as holiday celebrations or office parties) the meals are 100% deductible! Just be sure to document the event, the meals purchased, and the guest list.

Candace is the founder of NewWay Accounting and is a CPA who specializes in working with fellow entrepreneurs. She strives to take the fear and anxiety out of taxes and help empower small business owners to feel more confident and in control of their finances.