When can I deduct client or employee gifts?

Gifting during the holidays can strengthen relationships with employees and clients. However, the tax implications of these gifts can vary significantly depending on the recipient, value, and purpose. Understanding the rules is essential to avoid surprises during tax season.

Tax Rules for Employee Gifts

The IRS allows businesses to give gifts to employees, but the tax treatment depends on the nature of the gift:

1. De Minimis Gifts

   • Gifts of minimal value (e.g., a coffee mug, company swag, or holiday turkey) are considered "de minimis" and are not taxable to the employee.

   • These gifts must be infrequent and of nominal value, typically under $75.

2. Cash or Cash Equivalents

   • Cash gifts, gift cards, or any cash equivalents (like prepaid debit cards) are always taxable, regardless of amount.

   • These gifts must be included in the employee's W-2 and are subject to income and payroll taxes.

3. Tangible Personal Property

   • Non-cash gifts such as a watch, tech gadget, or gift basket can be excluded from taxable income if they qualify as de minimis. However, larger items are generally taxable unless they meet specific exclusions.

4. Achievement Awards

   • Special rules apply to employee achievement awards. Tangible personal property awarded for length of service or safety achievement can be excluded from income, up to $1,600 annually, if given under a qualified plan.

     
     

Tax Rules for Client Gifts

Client gifts can also be an effective way to show appreciation, but the IRS has strict rules on deductibility:

1. Deduction Limit

   • Businesses can deduct up to $25 per recipient per year for gifts given directly to clients. This limit applies to both individuals and businesses.

2. Incidental Costs

   • Costs for wrapping, shipping, or engraving a gift are not counted toward the $25 limit and can be fully deducted.

3. Promotional Items

   • Gifts with a business logo that cost less than $4, such as pens, calendars, or keychains, are considered promotional items and are not subject to the $25 limit.

4. Entertainment Gifts

   • If a gift could be classified as entertainment (e.g., tickets to a show or a sporting event), special rules apply. While entertainment expenses are generally nondeductible, gifts like event tickets can qualify for the $25 gift deduction if treated as a gift rather than entertainment.

Advice: Make sure you have a comprehensive Accountable Plan and De Minimis Policy in place prior to giving the gifts.